CRED: Financing housing growth and providing an alternative to traditional property investments

One of the biggest impediments to meeting the demand for real estate is sourcing finance for projects. Real estate developers and owners need to secure loans for purposes such as site acquisition, construction, improvements and residual stock.

In Australia, the ‘Big Four’ banks (complemented by smaller, second-tier banks) have traditionally controlled around 85 per cent of the CRED lending market; these Authorised Deposit-taking Institutions (ADIs) currently have $357.4 billion in commercial real estate loan exposures¹.

However, this has been undergoing a shift for some years, driven partly by banks’ shrinking appetite. ADIs have regulated capital requirements which constrain their lending appetites, and this has opened up more opportunities for privately funded alternative lenders, especially in the smaller and middle end of the market.

A report by independent research house Bond Adviser says that from around 2017, a “healthy influx of non-bank institutional lenders… marked the beginning of a permanent shift in market structure supported by a greater focus on risk management”².

This is due to a confluence of demand among those seeking capital and those providing it. Borrowers are looking for flexible, tailored loans that meet their business needs, while investors are looking to deploy their capital to investments that can provide stable income, downside protection and competitive returns.

In the past, investors seeking exposure to Australian real estate investments were mostly only able to do so through direct or indirect equity investments.

Against this background, debt-based real estate investments have grown in popularity and availability in recent years. Just as corporate bonds provide an alternative to buying shares in companies, CRED provides exposure to the property market without needing to own the assets.

There are generally two ways to invest in CRED:

1. Individual loans: investors are matched to specific loans, based on their risk profile and return preferences. The investor reviews the loan details to ensure it fits their needs prior to funding the deal. These loans usually require multiple investors, essentially creating a loan syndicate.
2. Discretionary funds: Investor capital is pooled in a fund and the investment manager allocates capital to a range of loans that align with the fund’s mandate. This provides investors with regular income based on a target return, as well as diversification across a portfolio of loans.

Discover more via the whitepaper.