Persistent market fluctuations, ongoing geopolitical uncertainty, and rising correlation between equities and listed fixed income have contributed to a more challenging environment for growth-oriented strategies and portfolio risk management. Traditional portfolio construction is under increasing strain.
The recent Federal Budget reforms to Capital Gains Tax (CGT) and negative gearing add further pressure.
Set to pass the Senate this month, these changes are not simply adjustments at the margins but, if legislated, represent a fundamental shift in how Australians approach property, investment, and wealth creation.
These reforms reinforce a broader shift already well underway – investors diversifying capital from appreciation to preservation. Alternative credit investments, including real estate private credit, are part of this shift, offering uncorrelated diversification, stable risk-adjusted income, and meaningful downside protection.
In an environment of constant volatility, uncertainty, and unpredictability, investment dynamics are changing, demanding a rethink of traditional portfolio construction and wealth creation strategies. Income, realised gains, and alternative assets are firmly in focus.
Growth to income: The balance is shifting
Capital appreciation has historically been central to portfolio construction, supported in part by a tax system that favoured long-term asset ownership and allowed capital gains to compound over time with an attractive tax offset. Residential property and equities have been key beneficiaries.
The CGT changes, if passed, will prompt a material reassessment. With growth no longer subject to favourable concessional tax treatment, the relative attractiveness of income-producing assets will increase. While growth assets remain an important part of long-term wealth creation, income strategies are now more likely to play a larger role.
Real estate private credit sits within this income category. It generates contractual, recurring distributions backed by physical assets. While not immune to risk, it is generally less exposed to equity volatility and largely uncorrelated to public markets. Critically, it is unaffected by the CGT changes that are now prompting this broader rethink. In this context, the defensive income profile of private credit has become considerably more attractive.
The scale of this shift, however, is more significant than these immediate changes. It is the reinforcement of a broader, long-term trend. Persistent and intensifying macro headwinds, coupled with the erosion of the traditional bonds-equities diversification relationship, have been pushing institutional and sophisticated investors toward uncorrelated alternatives for some time. The Budget announcements may well accelerate that rotation – particularly among high-net-worth investors and those prioritising capital preservation.
Alternative pathways to property
The changes to negative gearing are equally consequential, though in a different way. Direct residential property investment has long been the default for Australian investors seeking exposure to real estate. The approach was straightforward: borrow, hold, negatively gear, benefit from the CGT discount on the eventual sale. The Budget has disrupted each element of that equation.
Yet, I do not believe investor appetite for Australian real estate will diminish, the structural case remains too strong. What will likely change is how investors seek exposure to it.
The risk-return trade-off of direct property ownership – concentration, illiquidity, and capital intensity – becomes more pronounced without favourable tax treatment. As a result, some capital may be redirected.
Real estate private credit is set to benefit from this reset, offering a compelling alternative pathway to property. It provides exposure to the same underlying property sector without the concentration risk, illiquidity, and capital intensity of direct ownership. Instead, it can provide diversification across borrowers, geographies, and deal structures. And it does so with a stable, floating-rate income stream that benefits from the current rising rate environment.
For sophisticated investors, family offices, and SMSF trustees reassessing their investment structures, real estate private credit may provide alternative exposure to the Australian residential opportunity.
Real estate fundamentals remain
It would be a mistake, however, to interpret the Budget’s property reforms as a bearish signal on real estate itself. The underlying dynamics that drive the investment case for Australian real estate private credit are, if anything, stronger today than they were twelve months ago.
Current estimates suggest the country faces a shortage approaching one million homes. That structural imbalance continues to underpin demand. The Federal Government has committed significant capital to addressing the housing supply deficit, with initiatives designed to bolster the new build pipeline. At the same time, banks continue to pull back from construction and development lending, constrained by regulatory capital requirements and risk appetite. The gap between what borrowers need and what traditional lenders can provide has never been wider.
For specialist investment managers like Zagga, this environment creates genuine deal flow opportunity. We are funding into a structural housing shortage, supported by government policy, with increased demand from experienced developers who need capital to bring projects to market.
At the same time, housing demand is not going away. Changes to negative gearing may influence investor behaviour, potentially reducing the availability of investor-owned stock if investors delay asset sales – perhaps electing to hold assets until they reach more favourable tax brackets, such as retirement. This supply constraint could cause the rental market to constrict in the near-to-medium term and place further upward pressure on rents.
These current market conditions reinforce the fundamental case for new housing supply. That is good news for developers, and ultimately for investors.
Short-term uncertainty
The sheer reach and complexity of Budget reforms may cause a period of reduced activity. Sentiment drives activity, and uncertainty suppresses it.
Alongside the current macro headwinds, the Budget’s tax overhaul is yet another cause for pause. Some investors may defer capital deployment as they seek clarity on both the legislation and its implications.
Where this leaves Australian real estate private credit
Amidst a shifting macro and fiscal landscape, real estate private credit enters this period of change in a position of strength. Australia’s private credit market is now valued at approximately $235 billion in AUM.
However, private credit still only accounts for ~17 percent of our commercial real estate funding, compared with ~50 percent in more mature markets like the US and UK. Clearly, the opportunity for further growth is significant, and Australia has the structural tailwinds and market fundamentals to realise this untapped potential.
The Budget has reignited demand for income and alternative investments at a time of persistent volatility, uncertainty, and unpredictability. For investors, it provides another catalyst to reassess capital allocations, portfolio construction, and investment strategy, perhaps with greater emphasis on income, diversification, and risk management.
For sophisticated investors, it doesn’t pay to hide from the storm – it’s time to ride the tailwinds towards new opportunities.
Alan Greenstein is CEO and co-founder at Zagga.
