While private credit now makes up about a 14 per cent share of real estate lending in Australia, an alternative fund manager anticipates Australia’s private credit market in real estate lending will reach US levels – where it accounts for approximately 50 per cent of loans.
Speaking to InvestorDaily on the sidelines of the Australian Wealth Management Summit on Thursday, Capital Prudential managing director Jarrad Haynes said Australia is in the first stage of a “long growth journey in the sector”.
“Take America, it’s probably 10 or 15 years in front of us, so their market’s far more mature on private credit, and that’s both property and non-property, so far more established,” he said, adding that Europe is somewhere in between.
“So, I think if we follow those markets, which logic is we should, we can see we might end up somewhere between those areas in the next five to 10 years.”
As the story goes, after the royal commission prompted banks to retreat from the sector, a gap emerged for private players to fill. Over the past decade, that opening has fuelled a boom as new competitors moved in.
Haynes sees the present as a “golden moment” for the market, with a surge of new entrants and a wider pool of deals on offer. Yet he also warns that rising competition could bring challenges, particularly for those seeking access to these markets.
While private credit should be viewed as an alternative, and not as a complement to traditional bank lending, he argued that private credit has a big role to play in solving some of Australia’s current housing affordability issues.
In his view, one of the biggest hurdles to resolving the housing crisis is the inability to construct apartment buildings without sufficient pre-sales.
“Now, what private credit’s done is it will take more of a view on lower pre-sales, which allows a project to happen sooner,” he said.
This facilitates viable projects, especially given rising construction costs, by providing an alternative to initial bank financing. It essentially “bridges the gap” so a major bank can step in after private credit has first lent a hand.
He argued that one of Capital Prudential’s key advantages over other private credit peers is its investment in property equity, which provides a more balanced perspective.
“Our view has always been: you always look at a deal from the equity side down, because if it’s got a good profit margin, it’s got good equity coverage, the debt will sort of sit where it sits. The challenge is, when people just look at their exposure from a credit perspective, you’re not looking at the overall deal,” Haynes told InvestorDaily.
When it comes to areas to avoid, Haynes said the firm steers clear of high-rise projects and land subdivisions, citing liquidity challenges and a thin market. Instead, he noted, private credit works best in build-to-sell scenarios, which provide steady asset turnover and, critically, built-in liquidity.
Liquidity matters for two reasons: first, to recycle capital and reinvest in new deals to stay aligned with the market and second, to ensure the firm can meet investors’ needs when they wish to withdraw funds.
Interestingly, Haynes said the firm has found the most interest in private credit solutions in residential construction, which the firm focuses on low-rise inner-city dwellings. He also noted non-core commercial sectors from small-size warehouses to childcare centres.
At the same time, the sector is currently under scrutiny. Last month, Woodbridge Capital called on ASIC to tighten regulations for private credit funds, asserting that some managers are exploiting the existing lack of rules.
“I personally think it’s [regulation] very important,” Haynes said. “For us, what we’ve tried to do is get in front of that. We have a majority independent board and independent chairs on all of our investment committees,” he said, adding that he does foresee some issues among managers in private credit.
“And I think probably to sort the market out, it probably needs to happen, just to evolve a little bit,” he said.
Haynes also noted that questions remain regarding valuation frequency. While it is a key advantage of private markets compared to listed assets, third-party checks and annual valuations are essential to keep investors and borrowers safe.
“So I think a clamp down on all those things more around independent governance, what’s being communicated to investors, what’s reality versus what’s been promised. I think if we really focus on those things, that’ll weed out a lot of the issues in the sector,” he said.
