Real estate private credit to gain as rates rise, MaxCap says
Real estate private credit is set to keep growing 20 per cent annually and will draw in more investors even as the country’s biggest banks increase their exposure to the sector after years of pullback, non-bank lender MaxCap says.
With interest rates no longer likely to fall further and possibly even rising as early as February to combat a resurgent threat of inflation, private credit’s fixed margin over the cash rate gave it a hedge over higher borrowing costs that made it attractive, MaxCap research head Bruce Wan said.
“We’re talking about a situation where inflation is a bit higher,” Wan said.
“In terms of non-bank lending, provision of capital to develop commercial real estate, residential real estate – that will benefit from high interest rates. A lot of these loans are on floating-rate basis, so when cash rate goes up, there is a set margin above and beyond that cash rate.”
The growth would continue even as the country’s largest banks return to the sector, after previously reducing their exposure from 84.7 per cent of the commercial real estate sector in 2013 to 70.9 per cent in 2024, he said.
In October, NAB said it would increase its CRE lending over the next five years by 20 per cent to $30 billion.
But that would make little difference to the private credit market, Wan said.
“Where major banks are talking about 20 per cent growth targets over five years, that works to be around 4 per cent per annum, broadly in line with the expansion of the economy (nominal terms) and the financial system,” he said.
“The opportunities for growth for non-bank lenders are considerably larger, particularly in a segment that is still tracking to more than 20 per cent growth per annum.”
The fast-growing private credit sector – worth an estimated $224 billion, of which 41 per cent, or $92 billion, is to commercial real estate – is going through a major overhaul.
Money has flooded into the sector that now faces a higher level of scrutiny after a report by regulator ASIC that showed fee-gouging and lack of transparency about risks, losses and defaults.
Aspiring pubs baron Jon Adgemis’ $1.8 billion hospitality empire, built on lending from private credit, came to an official end in October with his bankruptcy.
Wan said greater regulation would bring greater protection for investors and would benefit larger providers such as MaxCap, in which US giant Apollo Global Management took a half stake five years ago.
Gap narrowing
“It is lifting standards in the sector,” he said.
“It’s a little bit more beneficial to the larger institutional platforms who already have to sort of play to those standards for their global institutional investors.”
Higher borrowing costs than were expected until recently were likely to widen the gap in returns between equity and private credit investors could expect, Wan said.
The gap between the average 6 per cent real estate equity return and 9 per cent-plus return in private credit was expected to narrow as rates fell further, but a changing of expectations to higher rates had changed that, he said.
“There’s that gap that … was expected to be a little bit closer in 2026 if we got rate cuts,” Wan said. “Without that rate cut, that’s expected to widen again.”
But after three 25-basis-point reductions this year, a period of hold, or even a couple of rate hikes wouldn’t reverse the pick-up in developments of residential or commercial property, he said.
“We do expect that supply improvement to continue,” Wan said.
“If we have one or two rate increases going forward, it will take some of that upside off the table. But it is still a situation where we’re looking at a very clear demand-supply imbalance in the residential market.”
