• Withdrawal of banks from commercial real estate lending boosting the private credit sector in Australia
  • RW Capital says investors increasingly looking at real estate private credit opportunities for higher yields
  • Credit Connect Group says private credit remains relatively unknown asset class in Australia, despite competitive yields

 

Singer-songwriter Paul Kelly’s timeless track From Little Things, Big Things Grow sums up the direction of Australia’s private credit market, according to funds management firm RW Capital.

Luke Dixon, who heads up RW Capital’s institutional capital and research, told Stockhead that non-bank lending is growing in Australia, particularly in the real estate sector.

Dixon says Australian real estate private credit is benefiting from long-term structural tailwinds supported by strong domestic economic fundamentals and the ongoing withdrawal of major banks from the commercial real estate lending market.

“This is creating the perfect storm which is converging to create an estimated $100bn liquidity gap over the next decade,” he says.

Dixon says for every 1% of bank withdrawals from the lending sector of commercial property $5 billion of liquidity must be found from the private market to plug the gap.

“The major banks have 90% of the market at the moment and we estimate that will be down to 75% within a decade creating a massive liquidity gap,” he says.

Dixon says the coming liquidity gap is occurring at a time when the Australian economy has rotated out of a period of low interest rates, and steady economic growth, into a new era of greater volatility and higher interest rates.”

“Our fundamental belief is that the growing shortfall in credit liquidity, and the ongoing resilience of the Australian real estate market, will create a positive demand/supply dynamic for private credit investors, delivering higher overall returns than equity investments in the near to medium term,” he says.

 

Yields above risk free rates

Dixon says reliable and experienced lenders, who actively manage their loan books, will generate a significant investment edge from this environment over the near to medium term.

“We have higher interest rates and bond yields, which are effectively higher risk-free yields, and that means investors are having to diversify beyond the traditional sectors of core office, retail and industrial because the returns are insufficient,” he says.

“Investors are moving into areas like private credit or emerging alternative asset classes like medical or data centers because the yields are above risk free.

“You can walk into any major bank and get 5% or 5.5% on a term deposit and $250,000 of that is underwritten by the Federal Government so it’s effectively a risk free return.”

Dixon says post the Global Financial Crisis rates were ultra low, which meant getting even a small return looked comparatively attractive to getting virtually nothing risk-free.

“In a volatile market investors need to consider upside opportunities but also downside risks,” he says.

“We’ve seen falling valuations which are downside risk across retail, office and industrial.”

Dixon says a positive about debt versus equity is that it takes into account this downside risk so you’re effectively hedging against your risk.

“On a standard loan where you lend 60% of an asset value you’re cushioned in the event that 40% of that value evaporates because of market factors,” he says.

“You can manage downside risk more effectively with private credit and I think that is a big driver of the growth in investor appetite for private credit.”

 

Private credit: under-the-radar asset class

Non-bank lender Credit Connect Group (CCG) offers a variety of flexible lending solutions, which may not be available through conventional lending channels such as traditional banks. All of their borrowers have Australian real estate to use as security for their loan.

CCG manages a Mortgage Fund offering these loans as First Mortgage Investment opportunities to their network of private investors.

CEO Peter Benson has been working in the sector for more than 30 years and told Stockhead many investors are simply unaware about private credit, or first mortgage investments, as a real estate asset class.

“We operate within the non-bank lending sector. Many investors aren’t aware of the investment opportunities that are available in Australian real estate. We provide this real estate asset class to our investors which is secured by a registered first mortgage.” he says.

Benson says CCG caters for borrowers that are not being adequately serviced for one reason or another by traditional lenders.

“We have borrowers who require capital promptly with flexible terms. Traditional banks have a history of difficult lending policies, so these types of borrowers come to us,” he says.

“The security for our private investors is the mortgage that we hold over the borrower’s property. If we were to lend 65% on a specific loan, there would always be 35% of equity in the property to offer a layer of protection to our community of private investors in the event of a default or adverse matter arising.”

 

Thinking of private credit as real estate asset

CCG operates the Credit Connect Select Fund, which is a mortgage fund that offers investors the opportunity to invest in specific real estate investment opportunities spanning commercial, construction, development, residential and vacant land properties, secured by a first mortgage.

Benson says CCG has over the years built up a strong referral base of borrowers that offer property as security and quality investment opportunities.

After assessing that the loan meets CCG’s lending policies, the investment opportunity is then offered to its strong network of private investors wanting to take advantage of higher yields in a secure property-backed asset class.

“Our main investor demographics comprise of two sectors namely retirees who need a decent return with monthly distributions, so are always looking for new investment opportunities, the other investor type are SMSF’s who are seeking a transparent investment so they can undertake their own due-diligence paying returns well above institutional deposit rates,” he says.

 

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.  Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.