Private credit lenders identify opportunities within the Australian real estate market as traditional banks exhibit caution
Private credit lenders are expanding their presence in segments of the Australian commercial property market, providing alternative financing options for borrowers as traditional banks reduce their high-risk lending activity due to a slowdown influenced by elevated interest rates.
The availability of funds for property transactions is increasing as a diverse set of investors, including pension funds, sovereign wealth funds, and insurance firms, seek higher returns that are challenging to find in today's equity markets, particularly in the real estate sector, which has experienced declines.
According to a report from Reuters, Qualitas, an Australian real estate specialist backed by the Abu Dhabi Investment Authority, has nearly doubled its assets under management to A$8 billion ($5.07 billion) since mid-2022, with approximately half of this growth occurring since June.
U.S.-based PGIM Real Estate intends to deploy an additional $1 billion in the Australian market over the next few years, as noted by its head of Australian real estate, Steve Bulloch.
Over the past 12 to 18 months, there has been a noticeable increase in institutional investor interest, with many viewing the Australian market as an attractive entry point to diversify their investment portfolios.
These developments are part of the ongoing expansion of non-bank lenders in a market where four major banks (Commonwealth Bank, National Australia Bank, Westpac, and ANZ Group) continue to dominate the majority of lending activities.
Nonetheless, non-bank lending in Australia, accounting for approximately 5% of all financial assets in 2022, remains relatively small in comparison to the International Monetary Fund's estimate of 50% on a global scale.
Non-bank lending has been on the rise, with over A$600 billion in assets reported last year, encompassing lenders focused on retail credit. Lenders are diversifying into residential and commercial construction, filling the void left by banks that are reducing lending or exiting such sectors, according to a March report from the Reserve Bank of Australia (RBA).
Investors can expect returns ranging from 9% to 11%, with the added security of loans secured against tangible assets such as condominiums or warehouses, often featuring a 30% to 40% equity buffer.
While these returns offer attractive investment opportunities, they also translate into higher costs for borrowers. The Reserve Bank of Australia (RBA) reported in March that the spread over a major bank loan is approximately 200 basis points for various types of business loans.
