Private credit in Australia is undergoing a remarkable transformation, with the real estate sector poised to quadruple over the next five years as commercial banks relinquish market share. This dramatic shift reflects a broader trend, where private credit is expected to grow from approximately 5-6 per cent of the Australian credit market to nearly 20 per cent, matching the penetration levels seen in Europe and the United States.
Furthermore, the numbers tell a compelling story about this evolution. Non-bank lending in Australian real estate is forecast to surge from $50 billion to $90 billion by 2029—an extraordinary 80 per cent increase in just five years. Meanwhile, major financial institutions are taking notice, with AustralianSuper currently tripling its exposure to global private credit to reach approximately $15 billion by the end of 2024. This growth is particularly evident in residential development, where private credit already funds around 26 per cent of projects, including land subdivisions. Additionally, property credit has become an essential component of the private credit landscape, particularly as Australia faces a chronic housing shortage projected to exceed 100,000 dwellings by 2027.
For investors considering this market, the appeal is clear. Over the past decade, private credit has generated annualised income returns of approximately 10 per cent. However, understanding how property credit fits into this expanding sector requires knowledge of the various investment structures, risk profiles, and access points. This article examines the rise of private credit in Australia, explores the role of property credit within this landscape, and provides insights into how investors can navigate this increasingly significant market segment.
The Rise of Private Credit in Australia
Private credit has arisen as an important financing alternative in Australia’s lending market, filling the gaps created by established banking institutions. Since the global financial crisis, this sector has experienced significant expansion due to regulatory shifts, increased investor appetite for yield, and favourable economic conditions.
Bank Lending Retreat: Regulatory Pressure and Risk Aversion
The growth in private credit over the past two decades was largely an unintended consequence of post-financial crisis regulatory reforms. Prudential regulators increased bank capital requirements for higher-risk lending categories, effectively prompting banks to adopt more conservative lending approaches. Subsequently, banks became more selective, implementing stricter criteria for borrower selection. The Australian Prudential Regulation Authority (APRA) continues to tighten lending regulations, most notably placing limits on house loans with high debt-to-income ratios. These constraints have created opportunities for alternative financing sources to thrive.
Growth of Non-Bank Lending: From $50B to $90B Forecast
The private credit market in Australia has seen remarkable expansion. Although estimates vary depending on definitions, the Reserve Bank of Australia places the market at approximately AUD 61.16 billion, representing about 2.5% of total business debt. Nevertheless, other sources suggest the market could be as large as AUD 305.80 billion. The construction and real estate sectors have been especially crucial, with private lending increasing from AUD 50.46 billion in 2016 to more than AUD 305.80 billion by 2025. Furthermore, projections indicate continued growth, with Australia’s private credit market forecast to exceed AUD 91.74 billion by 2030.
Institutional Capital Inflows: Super Funds and Insurers Join In
Institutional investors have progressively increased their exposure to private credit. As Australia’s superannuation sector grows past AUD 6.12 trillion, funds are seeking diversification beyond traditional assets. Concurrently, insurance companies are revising their portfolios with 47% planning to increase investment risk through private markets. For insurers, private credit has become a cornerstone strategy, with 55% already holding exposure primarily through global direct lending. Superannuation funds primarily invest indirectly via private credit funds, though some engage in direct lending through syndicated deals.
Types of Private Credit and Where Property Credit Fits
The Australian private credit market encompasses a diverse range of lending strategies, each with its own distinct risk-return profile. This market divides into three primary segments: corporate/commercial (20-40%), asset-backed/securitised (10-30%), and real estate (40-60%).
Corporate Loans vs Property Credit: Key Differences
Corporate lending primarily involves direct loans to businesses for working capital, expansion, or acquisitions. In contrast, property credit focuses on real estate assets, offering higher security through tangible collateral. While corporate loans evaluate a business’s performance, industry risks, and broader economic conditions, property credit relies on the underlying asset’s value. Corporate loans typically feature higher interest rates than property-secured loans due to their increased risk profile and potential lack of tangible collateral.
Senior Secured vs Mezzanine Debt in Real Estate
Within the capital stack of real estate financing, senior debt occupies the top position with first repayment priority and lowest risk. These first mortgage secured loans provide the foundation of most property credit arrangements. Below senior debt sits mezzanine debt, which bridges the gap between senior debt and equity. Mezzanine loans carry higher risk as they’re subordinate to senior debt but offer enhanced returns, typically ranging from 12% to 20%. This structure enables developers to maintain greater control over their projects, potentially enhancing their return on investment through tax-deductible interest.
Asset-Backed Lending: Residential and Commercial Property
Asset-backed finance (ABF), estimated to be worth more than AUD 30.58 trillion globally, secures loans against underlying asset pools. For residential properties, this includes owner-occupied and investment loans. Commercial applications encompass office buildings, hotels, and shopping centres. The security structure offers strong downside protection through highly diversified underlying assets, structured risk profiles, and bankruptcy remoteness. Commercial real estate loans vary by project stage, with bridge loans (ranging from 6 to 12 months) carrying lower risk/return profiles than construction loans (ranging from 12 to 30 months).
Infrastructure vs Property Credit: Risk and Return Profiles
Infrastructure assets, such as electricity grids and toll roads, deliver more reliable, inflation-linked cash flows compared to property investments. During economic downturns, core infrastructure demonstrates superior resilience, having experienced smaller drawdowns during the Global Financial Crisis (31% vs. 68% for property) and a quicker recovery (22 months vs. over 5 years). Moreover, infrastructure stocks consistently maintain a beta below 0.6, indicating lower volatility than property REITs, which historically have carried a beta of 0.9.
Benefits and Risks of Property Credit Investments
Property credit investments appeal to investors seeking diversification beyond traditional asset classes.
Income Generation: Floating Rate and Illiquidity Premium
Property credit investments typically offer floating-rate structures that adjust with market interest rates, providing real-time protection against inflation. Consequently, when interest rates rise, income from these investments increases accordingly. Investors also benefit from an illiquidity premium—additional yield compensation for accepting limited liquidity. This premium has historically allowed private credit to deliver returns approximately 1.3 percentage points higher than traditional 60/40 portfolios.
Risk-Adjusted Returns: Volatility vs Equity and Bonds
Private credit has demonstrated lower volatility compared to both leveraged loans and high-yield bonds over the past decade. During seven periods of rising rates since 2008, returns in direct lending averaged 11.6%, which is two percentage points above its long-term average. Unlike publicly traded assets, property credit investments aren’t subject to daily market sentiment fluctuations, resulting in more stable valuations.
Illiquidity and Default Risk: What Investors Should Know
Despite attractive yields, property credit carries specific risks. Investments are typically locked for fixed terms, limiting access to capital. Additionally, borrowers in private credit deals often cannot secure traditional bank loans, which implies a higher credit risk. Firstly, these investments lack government guarantees, unlike term deposits.
Covenants and Security: How Lenders Protect Capital
Covenants function as crucial early warning systems for lenders. These contractual provisions set conditions borrowers must satisfy, with violations occurring in approximately 13% of cases. Primarily, they protect lenders by restricting risky corporate behaviour. Conservative loan-to-value ratios—typically capped at 65%—provide a buffer against fluctuations in property values.
How to Access Private Credit Funds in Australia
Investors have multiple avenues for accessing Australia’s growing private credit market, each with distinct characteristics and suitability profiles.
Direct Investment: Control, Transparency, and Risk
Direct investing involves funding individual loan transactions through private credit platforms, offering complete visibility into loan structures, underlying assets, and borrower profiles. This approach allows tailored exposure aligned with specific risk/return preferences regarding term, location, and loan purpose. Indeed, direct investments can provide higher potential returns yet demand active involvement, as investors must evaluate each transaction individually and commit capital for the full loan term, typically 18-24 months.
Private Credit Funds Australia: Diversification and Simplicity
Professionally managed funds pool capital from multiple investors, spreading investments across numerous loans. This structure provides a regular income based on target returns, alongside broader exposure. Most investors access private credit through investment funds, including unlisted managed funds or ASX-traded vehicles like ETFs and LITs. Generally, funds minimise concentration risk as underperformance in one loan is offset by stronger performers.
Fund Manager Selection: Track Record and Due Diligence
Selecting the right manager is crucial, as performance dispersion between top- and bottom-quartile managers reaches nearly 20%, approximately ten times greater than in public equity markets. Investors should evaluate:
- Manager’s ability to source deals and industry knowledge
- Risk management processes and diversification approaches
- Transparency in valuations and fee structures
Liquidity Terms: Open-Ended vs Closed-Ended Funds
Open-ended funds offer specified periodic liquidity, enabling investors to enter and exit at predetermined intervals. Conversely, closed-ended funds lock capital for the entire lifecycle, typically 5-10 years. Notably, even with open-ended structures, liquidity should align with the underlying asset characteristics to avoid redemption issues during market stress.
Conclusion – Private Credit
Private lending has developed as a major player in the Australian financial environment. The market stands poised for extraordinary growth, with projections suggesting an expansion from 5-6 per cent to nearly 20 per cent of the Australian credit market. Property credit occupies a central position within this ecosystem, accounting for approximately 40-60% of all private credit activity.
The retreat of traditional banks from specific lending segments has undoubtedly created substantial opportunities for private lenders. This shift appears most pronounced in real estate financing, where non-bank lending is forecast to surge from $50 billion to $90 billion by 2029. Additionally, institutional investors, such as superannuation funds, have recognised this potential, significantly increasing their allocations to private credit strategies.
Property credit offers distinct advantages compared to other private credit segments. Unlike corporate loans, property credit offers tangible asset security, while the capital stack structure enables investors to select risk levels that align with their investment objectives. Senior secured loans offer lower risk profiles with priority repayment rights, whereas mezzanine debt presents higher returns but increased risk. Asset-backed lending, which encompasses both residential and commercial properties, further diversifies the available options.
The Australian private credit market has undoubtedly established itself as a compelling opportunity for investors seeking yield and portfolio diversification. Although still maturing compared to European and American counterparts, property credit within this sector offers a balanced combination of security, income, and growth potential that will likely continue to attract both institutional and sophisticated individual investors in the years ahead.
What is driving the growth of private credit in Australia?
The growth of private credit in Australia is primarily driven by the retreat of traditional banks from certain lending segments due to regulatory pressures and a risk-averse approach. This has created opportunities for alternative lenders, particularly in the real estate sector.
How does property credit differ from other types of private credit?
Property credit focuses on real estate assets and offers higher security through tangible collateral. Unlike corporate loans, which analyse business performance, property credit is based on the underlying asset value, resulting in lower interest rates owing to less risk.
What are the main benefits of investing in property credit?
Property credit investments often provide strong income generation through floating rate structures, offer an illiquidity premium that enhances returns, and demonstrate lower volatility compared to public markets. They also provide portfolio diversification for investors.
What risks should investors be aware of when considering property credit investments?
Key risks include illiquidity, as investments are typically locked for fixed terms, and potential default risk, as borrowers may not qualify for traditional bank loans. However, these risks are often mitigated through covenants and conservative loan-to-value ratios.
How can investors access private credit funds in Australia?
Investors can access private credit funds through direct investments in individual loan transactions or through professionally managed funds that pool capital across numerous loans. Fund options include unlisted managed funds and ASX-traded vehicles, such as ETFs and LITs.