The firm said private credit in Australian CRE has more than doubled over the past four years, adding that the sector’s strong growth phase is “far from over”.
Metrics Credit Partners has come under scrutiny recently following Lonsec’s downgrade of three Metrics funds, which cited overlapping investment committees, related party transactions and rising equity exposure that could blur the firm’s mandate.
The private credit sector itself has also been described as a “victim of its own success”, caused by an environment where lenders took on riskier loans to service demand.
Meanwhile, an ASIC-commissioned report released in September found that some private credit managers earn undisclosed fees three to five times higher than advertised and, in some cases, retain default interest from struggling borrowers, although it did not name specific firms. More broadly, it raised governance gaps, infrequent valuations, inconsistent investment reporting and conflicts of interest.
But Metrics’ latest white paper, Here to stay – Real estate private credit’s ongoing role in investment portfolios, has forecast a further 85 per cent growth by 2029.
The company said private credit’s success has been driven by two key factors – a tumultuous few years of global shocks and rising interest rates that made private credit attractive to investors and the need for lenders to fill a “funding gap” left by the retreat of banks from CRE lending.
According to Foresight Analytics, CRE private credit is projected to exceed $160 billion by 2029. Of the $205 billion private credit market in 2024, consultant Alvarez & Marsal, which conducted the study, estimated that CRE-backed private credit sits at around $86.6 billion – a stark increase from an estimated $35 billion in 2020.
“The rise of real estate private credit as an investment class has been rapid over recent years and there are good reasons why it will remain a mainstay of a balanced investment portfolio,” the Metrics report stated.
“For investors, it has been a rough ride in many asset classes since COVID-19. The initial pandemic growth shock was followed by further cuts in already low interest rates, then supply chain issues, a surge in inflation and eventually higher interest rates globally from around 2022 onwards and continued ongoing geopolitical threats,” the report said.
Metrics noted that rising interest rates after an extended period of ultra-low rates have turned the typical negative correlation between bonds and equities positive.
“This means both assets simultaneously had a lean period and bonds have not been the typical counter-cyclical cushion to portfolio performance they normally have.”
A lack of interest in equity investment in real estate has also made CRE-backed private credit an attractive alternative, offering qualities of both bond and equity investments, according to Metrics.
“Like a bond, private credit offered very stable and predictable income flows but without the exposure to the volatility of public markets.”
While the interest rate cycle may have turned, Metrics believes this shift will only further increase demand for CRE credit, with banks likely to remain constrained in their ability to meet that demand.
“Metrics expects that investors will continue to embrace private credit and make it permanently a vital part of their portfolio construction.”
Regulatory capital rules continue to constrain banks
The retreat of banks from many types of CRE lending has created a “funding gap” that non-bank lenders have been able to fill, according to Metrics.
“For banks and regulated authorised deposit-taking institutions (ADIs), tighter regulatory capital requirements have been a long-term but cumulative trend.”
Metrics said CRE lending – particularly development finance – carries higher risk ratings and requires more capital to be held against those exposures.
“The impact of this is that Australia’s major banks have retreated from many parts of CRE lending. Banks have been particularly unwilling to lend to undertake development and land loans that carry higher risk ratings.”
However, demand for CRE and development lending remains strong, with Australia’s population growth driving the need for new construction across most sectors.
Population growth of 9.1m by 2050 will drive real estate demand
The Organisation for Economic Co-operation forecasts that Australia’s population will grow by an additional 9.1 million people by 2050 – an average annual rate of 1.1 per cent – which will require substantial future real estate development.
“For Australia specifically, continued strong population growth means considerable development across all real estate sectors will be required long-term and private credit will play a crucially important role in funding this development,” the Metrics report said.
“This has created a ‘funding gap’ for CRE lending, which has become the major opportunity for non-bank lenders to fill the gap and fuel the extraordinarily strong growth of private credit.”
Borrowers have embraced private credit providers, Metrics said, not only due to credit availability but also for the flexibility of loan terms.
“For banks, the high capital requirements of development lending in particular have forced them to remain very conservative in terms of gearing levels and terms such as pre-sales requirements for residential projects … borrowers have been more than willing to pay a slightly higher interest rate in exchange for the more flexible loan terms that non-bank lenders have been able to provide.”
Metrics said some of the ideal conditions that drove CRE private credit have shifted – notably the new downward cycle in interest rates and stabilisation of CRE yields. This has prompted questions over whether the sector’s strong growth trajectory will continue.
“Forecasts suggest that growth will remain strong. Foresight Analytics project that the current market estimate of $86.6 billion will grow by around 85 per cent over the five years from 2024 to 2029 to $160.5 billion.
“From a market share perspective, this translates to a lift from around 17 per cent in 2024 for non-bank lending to 22 per cent in 2029.
“This implies that there will continue to be growth in both the overall CRE lending market and the market share of non-bank lenders to sustain the high levels of market growth projected.”
Metrics also believes investors have become comfortable with the risk-return profile of real estate private credit and how it complements other parts of their portfolios.
“The resilience of CRE private credit lies in the security of its underlying property assets, offering a clear advantage over other asset classes and helping to protect investor capital,” the report said.
Parts of the sector may come under pressure
However, Metrics has admitted that while long-term growth prospects remain strong, parts of the sector may face pressure during economic downturns or periods of rising loan delinquencies.
Private credit’s risk-adjusted returns are likely to remain attractive to investors even as some of the tailwinds that fuelled recent growth – such as higher interest rates ”begin to ease”.
Metrics highlighted that as macroeconomic conditions shift, volatility is inevitable.
“Scale, experience and a diversified product offering can support consistent performance by enabling managers to access a broader opportunity set and manage portfolio risk effectively.
“Market conditions remain favourable for private credit and we do not anticipate any significant changes in the near term. We are, however, prepared for any deterioration in economic conditions that become less favourable for CRE lending.”
