Institutional investors eye Australian property debt plays
Australia's $330 billion (A$500 billion) commercial real estate market is opening up significant opportunities for private credit providers as banks retreat from the sector, according to Bruce Wan, head of research at MaxCap Group.
MaxCap
“Non-bank lenders have doubled their asset size in just three years as the sector grows increasingly attractive to global players, with different investor classes entering the space at varying speeds,” Wan told AsianInvestor.
“High-net-worth, sophisticated private investors were early adopters, moving quickly to chase returns and manage risk. Institutional investors like pension funds typically take longer to enter due to their more extensive due diligence processes and need for board approval.”
Despite this cautious approach, several major pension funds have already established significant positions in the sector. These include the country’s largest superannuation fund, AustralianSuper, the $62 billion construction industry fund, Cbus, and the $670 billion Dutch pension fund, APG Asset Management.
“The sector is definitely seeing increased interest from both domestic and international investors seeking better portfolio diversification, especially after traditional diversification strategies proved less effective in recent market conditions,” he said.
Throughout periods of market volatility, Australian commercial real estate debt has demonstrated stable and resilient returns across various interest rate cycles.
"Over nearly 18 years, we've seen consistent annual returns ranging from 10% to 15% through both low and high-interest rate environments," said Wan. "While private equity investments have experienced volatility during interest rate adjustments, private credit has maintained remarkable stability."
AUSTRALIA ATTRACTION
The reduced appetite of Australian banks for commercial real estate debt is creating attractive opportunities for private debt investors, according to Phil Miall, head of private debt Australia at QIC.
“At the same time, asset owners have a good appreciation of the value offered by private lenders in terms of capital flexibility, speed of execution and reliability,” Miall told AsianInvestor.
QIC
While current market conditions have temporarily dampened transaction volumes, he maintains an optimistic outlook, expecting activity to increase as interest rates eventually ease.
Miall highlights the structural advantages that make Australia's private debt market particularly appealing compared to other developed markets.
“Australia's private debt market is less competed than offshore loan markets such as the US," he said.
"This reflects several factors including the absence of both a high yield bond market and a CLO (Collateralised Loan Obligation) market, as well as ongoing disintermediation of domestic bank lending in some sectors due to increased regulatory capital requirements."
These market dynamics are translating into tangible benefits for investors.
"We see compelling relative value in Australian private debt, with all-in margins of senior secured loan investments offering a pick-up of over 200bps versus equivalent credit quality US high yield credit spreads," Miall said.
This pricing advantage, combined with the market's structural features, positions Australian private debt as an increasingly attractive option for institutional investors seeking yield in a well-regulated environment.
SWEET SPOT
The evolution of Australia's commercial real estate lending landscape is presenting new opportunities for private credit providers, according to Paul Brindley, head of debt advisory for Asia Pacific at JLL.
JLL
While the shift in bank lending has been more gradual compared to other markets, Brindley acknowledges that it has still opened up significant space for alternative lenders.
"While we haven't seen a dramatic pullback from banks in Australia like in some other markets, there's definitely been a shift. As property values have adjusted, banks have become more selective, creating a sweet spot for private credit providers," Brindley told AsianInvestor.
This transition has been particularly evident in specific financing segments, with private lenders actively filling gaps in stretch senior and mezzanine financing.
Brindley emphasises that while institutional transactions typically don't benefit from full recourse lending, Australia's market offers other compelling features that draw interest from both domestic and international investors.
"Australia stands out for its relatively high yields and exceptional market transparency, particularly when compared to other Asia-Pacific regions, as it relates to enforceability," he said.
"This combination of attractive returns and a well-structured, predictable market environment is garnering attention from both domestic and international investors," said Brindley.