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Real estate credit is now Australia’s number one investment class

The private real estate credit market is now Australia’s number one investment class by annual investment volume, according to a new report.

A report from RW Capital found that in 2023, private credit allocations in real estate were $25 billion, compared to $23 billion in equity investments.

By 2024, private credit allocations increased to $54 billion year-to-date,​ and will grow to $154 billion per annum by 2034​.

RW Capital Head of Research and Institutional Capital, Luke Dixon, said non-bank lending has seen remarkable growth in Australia, particularly in the real estate sector.

“Real estate private credit is gaining a larger market share of investment capital as investors seek a defensive source of yield and look to diversify away from real estate equity, while achieving strong, consistent, risk-adjusted returns that are secured, and have strong downside protection features,” Mr Dixon said.

“The defensive nature of private debt in the overall real estate capital stack offers enhanced safety, while the floating rate nature of returns provides a positive hedge against inflation.” 

Mr Dixon said Australian real estate private credit was benefitting from long-term structural tailwinds, supported by strong domestic economic fundamentals and the ongoing withdrawal of major banks from the commercial real estate lending market.

“This perfect storm is converging to create an estimated $100 billion liquidity gap over the next decade,” he said.

The coming liquidity chasm is occurring at a time when the Australian economy is rotating out of a period of low interest rates, and steady economic growth, into a new era of greater volatility and higher interest rates.”

He said incorporating private credit strategies into a diversified portfolio would be critical with interest rates expected to remain ‘higher for longer’.

“Real estate private credit is especially compelling, as it offers higher, risk adjusted returns compared to equity, shorter investment tenure and access to cash flow yield through the holding period,” he said.

“Our fundamental belief as a house is that the growing shortfall in credit liquidity, and the ongoing resilience of the Australian real estate market, will create a positive demand and supply dynamic that will deliver higher overall returns than equity investments in the near to medium term.”

Mr Dixon said as a higher for longer interest rate environment persists around the world, economies with strong underlying fundamentals like high population growth, deep investment markets and well regulated, tax efficient investment structures will stand out for their ability to deliver stronger risk adjusted returns through all cycles.

“Australia has a long and distinguished track record of delivering long stable economic growth, a resilient real estate market and a transparent investment environment that is supportive of inbound capital,” he said.

He said Australia offers investors a stable and growing economy, with resilient real estate markets. 

“This is underpinned by robust population growth, a deep, transparent investment market with best-in-class property rights and a demographic strength attracting a global pool of young, highly educated talent via targeted, growth focused migration policies,” he said.

“According to the IMF, Australia’s population is forecast to grow at an average rate of 1.2 per cent per annum over the next five years, which will drive sustained long term demand for housing, and support consumer growing spending and employment as the population ages.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.