Private credit
The case for real estate credit
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Frank Danieli
Managing Director
Published 27 May 2024
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What is real estate credit?

Real estate credit (also known as real estate debt) is a form of asset-backed credit and a rapidly growing asset class in Australia.

An investment in real estate credit is the provision of a loan to a borrower with the principal security being a first-ranked mortgage over that borrower’s real estate asset. The loan gives the lender (investor) rights to a contracted income return (being the interest on the loan) with significant downside capital protection from the security.

Credit security can take many forms, but one of the most secure and defensive positions is the registered first mortgage. This position in the capital structure gives the lender priority to proceeds when the asset is sold or re-financed. Additionally, the lender can take control of the asset if the borrower defaults.

Compelling relative value in a higher interest rate environment

Through what is often a floating interest rate structure (offering a margin above the RBA Cash Rate), investing in real estate credit has increased in relative attractiveness. It is a defensive asset, well-positioned to take advantage of a higher interest rate environment.

Real estate credit, both cyclically and structurally, can offer diversification benefits and compelling relative value. In the hands of an experienced manager with multi-cycle experience, it seeks to provide investors with a reliable income return adjusted for inflation. Importantly, real estate credit also offers the opportunity for capital protection via secure lending structures attached to the underlying investment being the registered first-ranked mortgage.

Strong growth for real estate credit, but a careful approach necessary

Australia’s vast and highly diverse residential real estate market grapples with acute undersupply in the face of soaring demand. Despite the market imbalance, the forecast for residential prices over 2024/25 remains relatively benign as several key variables are in play.

Record levels of immigration, demographic changes, increasing average household size and acute affordability pressures are all impacting both the rental and owner-occupier market.

A wide range of outcomes is possible, depending on location and depth of the market. Values will remain strongest in markets with the most acute demand/supply imbalance, for example metropolitan Sydney.

The key questions for real estate credit investors will be the impact of the increasing affordability crisis on sales and prices, and which pockets of the market will continue to perform and offer opportunity.

Undoubtedly, the opportunities for private lenders to finance the growing demand for real estate credit will continue as they work to complement the major lenders in addressing the critical housing shortage. Sound market fundamentals, security through first lien mortgages and an experienced manager to assess underlying value and exit strategies will remain critical to success.

For more information about our real estate credit solutions, please get in touch.


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