RW Capital says banks' retreat from commercial real estate lending is revitalizing Australia's private credit sector, with investors increasingly turning to real estate private credit opportunities in search of higher yields. Credit Connect Group says private credit remains a relatively unknown asset class in Australia, despite competitive yields.
Singer-songwriter Paul Kelly's timeless song, “From Little Things, Big Things Grow,” sums up the direction of Australia's private credit market, according to fund manager RW Capital.
Luke Dixon, head of institutional capital and research at RW Capital, told Stockhead that non-bank lending was growing in Australia, particularly in the property sector.
Dixon said Australian real estate private credit was benefiting from long-term structural tailwinds supported by strong domestic economic fundamentals and the continued withdrawal of large banks from the commercial real estate lending market.
“This is creating a perfect storm and will create an estimated $100 billion liquidity gap over the next decade,” he said.
Dickson said that for every 1% of bank withdrawals from the commercial real estate lending sector, they would need to secure $5 billion in liquidity from the private markets to fill the gap.
“Currently the big banks control 90% of the market, but we predict that this will fall to 75% within 10 years, creating a huge liquidity gap,” he said.
Mr Dixon said the upcoming liquidity gap comes at a time when the Australian economy is moving from a period of low interest rates and stable economic growth to a new period of greater volatility and higher interest rates.”
“Our fundamental belief is that the growing credit liquidity shortage and the continuing recovery of the Australian property market will create positive supply and demand dynamics for private credit investors, which will generate higher total returns than equity investments in the short to medium term,” he says.
Yields above the risk-free rate
Dixon said reliable, experienced lenders that are actively managing their loan book will generate significant investment advantages from this environment in the short to medium term.
“Interest rates and bond yields are rising, and effectively risk-free yields are rising too, which means insufficient returns are forcing investors to diversify outside of traditional sectors like core office, retail and industrial,” he said.
“With yields rising above risk-free rates, investors are moving into areas such as private credit and emerging alternative asset classes such as healthcare and data centers.
“If you go to a major bank, you can get 5% or 5.5% interest on a fixed term deposit, and $250,000 of that is guaranteed by the federal government, so it's essentially a risk-free return.”
Dixon says interest rates were so low after the global financial crisis that even a small return seemed relatively attractive compared to almost nothing with no risk.
“In volatile markets, investors need to consider the downside risks as well as the upside opportunities,” he says.
“Valuations have fallen across retail, office and industrial, which poses downside risk.”
Dixon says the advantage of debt and equity is that it allows you to take this downside risk into account, effectively hedging it.
“A standard loan where you lend out 60% of the property's value mitigates the impact if market factors wipe out 40% of that value,” he says.
“Downside risk can be managed more effectively in private credit, and I think that's a big driver of the increased investor interest in private credit.”
Private Credit: An Underappreciated Asset Class
Credit Connect Group (CCG) is a non-bank lender that offers a range of flexible lending solutions that are not available through traditional lending channels such as traditional banks. All of its borrowers own Australian property as collateral for their loans.
CCG manages mortgage funds and offers these loans as first mortgage investment opportunities to a network of private investors.
CEO Peter Benson has worked in the sector for more than 30 years and told Stockhead that many investors have no idea about private credit as a real estate asset class, namely first mortgage investing.
“We operate in the non-bank lending sector and many investors are unaware of the investment opportunities in Australian real estate. We offer investors this real estate asset class secured by registered first mortgages,” he says.
Benson says CCGs address the needs of borrowers who, for one reason or another, are not being adequately served by traditional lenders.
“We have borrowers who need capital quickly on flexible terms, and they come to us because traditional banks have a history of being strict with their lending policies,” he says.
“The collateral for our retail investors is our mortgage on the borrower's real estate. When we lend 65% on a particular loan, we always have 35% equity in that property to provide a layer of protection for our retail investor community in the event of a default or adverse event.”
Thinking of private credit as a real estate asset
CCG manages Credit Connect Select Fund, a mortgage fund that offers investors targeted real estate investment opportunities across commercial, construction, development, residential and vacant land properties secured by first mortgages.
Benson says over the years CCG has built up a strong referral base of borrowers offering real estate as both collateral and a high-quality investment opportunity.
After assessing whether the loans meet CCG’s lending policies, investment opportunities are offered to a strong network of private investors looking to take advantage of higher yields in a safe real estate secured asset class.
“Our primary investor base consists of two sectors – retirees who require a decent income through monthly distributions and are constantly looking for new investment opportunities, and SMSFs who want transparent investments, conduct their own due diligence and pay returns well above institutional deposit rates,” he says.
The views, information and opinions expressed in the interviews in this article represent solely those of the interviewees and do not necessarily reflect the views of Stockhead. Stockhead does not provide, endorse or otherwise accept responsibility for any advice on any financial products contained in this article.