Private debt investors are a crucial part of the housing shortage solution

• Australia has a chronic housing shortage and greater access to funding for property developers is part of the solution
• The private lending market is a critical link in the property development chain especially for property developers and asset owners with complex borrowing needs
• A growing cohort of investors are looking to commercial real estate debt investment to tap into the higher interest rate environment, with lower volatility.

Private debt investors are playing a growing role in addressing the housing crisis in Australia, as they provide an additional source of much-needed capital to housing developers, a new white paper argues.

As Commercial Real Estate Debt (CRED) grows in popularity as an asset class, the paper by Zagga, titled, ‘The Power of Private CRED: Why the time is NOW’, sets out the convergence of factors driving this evolution. These include demand from property developers, investors searching for income, and a desire for property exposure beyond listed investment vehicles.

Alan Greenstein, CEO and co-founder of Zagga, said, “There are two key drivers of the current growth of CRED. The first is demand for flexible and tailored loans to the real estate sector, including developers. The second is investor preference. In a rising interest rate environment, yields on debt investments are more attractive than they’ve been for over a decade. For investors seeking income, CRED may provide the risk and return profile that meets their needs.”

The paper explains that while the asset class is referred to as ‘commercial’ real estate, much of the lending in CRED is actually directed towards the development of residential housing. In addition, residential housing creates demand for other real estate types such as retail, factories, warehouses, offices and schools. Mr Greenstein said, “It’s no surprise that developers are particularly focused on residential, given the strong market fundamentals supporting the sector.”

The paper sets out how a shortage of housing in Australia is exacerbated by historically low housing approvals and construction starts, and a stronger-than-anticipated recovery in population growth after COVID. “It’s very concerning that the number of dwellings being approved is low by historical standard, even though the population is larger than ever. There is a mismatch between supply and demand that is unfortunately set to worsen. In this context, we need more capital available to the people willing to plan, design and build homes for Australians,” Mr Greenstein said.

Currently, the Australian population of approx. 27 million people is growing at 2.4% annually – or an additional 624,100 over the period - while 13,000 – 15,000 dwellings are approved each month. The last time approvals were that low was 2012, and almost 4 million fewer people lived in this country. “There is one urgent conclusion we can draw from this: we need to build more housing. Access to capital should not be an impediment to that goal, and private debt is a critical link in the property development chain” Mr Greenstein said.

The rise of CRED comes amid a global shift towards private debt as an asset class, with global private debt assets under management are expected to almost double between 2022 and 2028. The Zagga paper explains that private, non-bank lenders provide a differentiated offering from banks.

“With strict capital requirements and strong market dominance, Australia’s banks have less incentive to ‘go the extra mile’ when assessing commercial real estate borrowers. If a property developer or asset owner has more complex or ‘out of the box’ borrowing needs, the private lending market can be more suited to assessing the specific risk profile and structuring a deal appropriately,” Mr Greenstein said. At the same time, investors are seeking out property exposure with less volatility than listed real estate securities.

“Investors generally want to be compensated for the risk and volatility of any investment they make. Looking at the performance of equity-based real estate investments in recent years, and comparing with the yields available from real estate debt, there is a compelling case to be made for CRED,” Mr Greenstein said.

For media enquiries and to receive a soft-copy of the whitepaper, please contact info@zagga.com.au