Surging demand ‘will quadruple’ real estate private credit in 5 years

In total, it took about two minutes on average to complete, with 10 seconds being the time it took for most investors to commit after closing the supplementary product disclosure statement in their app. Larger loans, with up to 1000 retail investors, take longer, he said.

As the Australian Securities and Investments Commission’s decision last month to issue stop orders on three real estate credit products issued by investment manager La Trobe Financial showed, authorities have concerns about standards across the fast-growing sector, including for valuations, fee disclosure and liquidity risks.

In a report last month the regulator said private credit was more risky because of “significant investment” in higher-risk real estate construction and development, while the sector was also drawing in “a concentration of less experienced investors”.

But the clear strength of demand to invest in real estate private credit means it is set to grow from about 5-6 per cent of the Australian credit market up to about 20 per cent, in line with market penetration in Europe, Griffin said.

“There are some asset classes the banks do so well that we’ll never tread on their toes,” he told The Australian Financial Review.

“If banks don’t do it well enough, the debt capital markets will do well enough. But everywhere else – development, construction, commercial, anything slightly complex – the field is absolutely open, and the banks do nothing other than retreat from those loan categories.”

Australia accounted for 40 per cent of the Asia-Pacific region’s $US11.2 billion-worth of real estate private credit inflows over the four years to 2024, a new report by Knight Frank shows. India was the second-largest market in the regional grouping, with 36 per cent.

The commercial agency says Australia will account for almost half of the $US90 billion to $US110 billion ($136 billion to $167 billion) in private credit growth over the next three years across Australia, Hong Kong, India and South Korea.

While Australia’s private credit market was playing catch-up in volume terms with more established markets in Europe and the US, it was also riskier because a high proportion of credit was for higher-risk development loans, said Knight Frank director of capital advisory Simon Mathews.

“The private credit market in Australia is very development-focused,” Singapore-based Mathews said. “It needs to be well-regulated if the bulk of loans are in a high-risk bracket. In the US and Europe in private credit there is a much more diverse mix between traditional investment loans, which sit lower down the risk curve.”

A separate forecast from Singapore-based CapitaLand Investment estimated that Australia’s commercial real estate private credit market, worth $85 billion last year, will nearly double to $153 billion by 2028.

Regulation needed for investor confidence

Further regulation was inevitable, but also necessary to give offshore investors – who would provide much of the capital – confidence in the growing Australian market, even if a heavier regulatory hand slowed growth in the sector in the short term, Mathews said.

“If more regulation comes into play, more international players and more investors are going to gain confidence in the sector,” he said.

Property fund manager Forza Capital says tighter standards will benefit the sector. Forza co-founder Adam Murchie, who has started a new wholesale investor-focused real estate debt fund with real estate debt manager Madigan Capital, calls ASIC’s position a “prudent” one.

“It can only be a good thing there’s a bit more disclosure in those areas, so people can form a considered, informed view of what they’re backing and the risk they’re taking on,” Murchie said.

“That’s what the sector has probably undercooked a little bit.”

The Forza Real Estate Debt Fund is also offering investors a return range between 7.35-9.35 per cent pre-tax, net of fees, based on a 3.75-5.75 per cent spread over the benchmark cash rate, which he said was a lower return than other funds offered, but less risky.

“We’re trying to bring private investors slightly down the return curve but materially down the risk curve,” Murchie said.

Knight Frank says private credit funds in Australia generally seek returns up to 6.5 per cent over the Reserve Bank’s cash rate.

Back to basics

Balmain Private’s $2.25-million loan, on a 35 per cent loan-value ratio, allows the owner of a development property near Cessnock in the NSW Hunter region to refinance their asset at rate of 10.4 per cent.

It will pay investors a rate of 8.8 per cent, with Balmain taking the spread as a management fee.

Investors in the $1.5-billion managed investment scheme – where borrowers generally pre-pay interest for the loan term – had little appetite for more complex and riskier types of debt than the passive type of loan such as to the Cessnock developer, Griffin said.

But sophisticated investors in a separate $2.4 billion wholesale fund did and were invested in real estate development and corporate loans, helping drive a doubling of Balmain’s funds under management to $4 billion, he said.

Balmain’s own growth suggested the overall growth in Australian real estate private credit was greater than the Knight Frank figures indicated, Griffin said.

“Those numbers are understated by a factor of three to four, I would suggest,” he said.