Real estate private debt in Australia

Real estate private debt can be known by many names, including private credit or commercial real estate debt (CRED) which is a subset of the broader private debt umbrella. Put simply, private debt is when investors lend money to private companies or individuals (borrowers) outside of publicly traded markets, like the Australian Stock Exchange. The loan is secured against collateral, such as a commercial property, which helps to protect investor capital.

Many mistakenly believe non-bank loans (i.e. private debt) are inherently riskier investments than traditional bank loans. This has seen investors quick to dismiss this ‘all-weather’, defensive asset class. While it is undoubtedly important to work with a trusted, reputable investment manager, investors must separate fact from fiction when considering if private debt is right for them.

Real estate private debt can offer unique benefits, for both investors and borrowers.

For income-seeking investors, the offer of attractive, reliable and risk-mitigated returns backed by a tangible, real property asset can be a compelling investment case.

1.  Higher returns: Private debt investments can often provide higher yields compared to traditional public debt instruments like bonds. This is largely due to the illiquid nature of the investment which can translate into better returns for investors.
2. Steady, predictable income: Private debt investments typically offer regular interest payments, providing a stable income stream. This can be particularly attractive for investors seeking steady cash flow.
3. Diversification: Including private debt in a portfolio can enhance diversification. Unlike traditional asset classes like stocks and public bonds, private debt tends to have little to no correlation with the public markets which can help reduce overall portfolio risk.
4. Capital preservation: Many private debt investments are secured by collateral, such as real estate or other tangible assets. This security can help protect the principal investment and mitigate the risk of loss. Senior debt in particular sits as the highest, or most secured, layer of the capital stack. Senior debt is also commonly referred to as first mortgage secured loans, historically provided by traditional lending institutions such as banks and credit unions, but now also provided by non-bank lenders. Senior debt investors are given the highest priority in terms of repayment as the investment is secured by a mortgage over the property. This gives the senior debt lender recourse over the property in the event the borrower defaults on the loan.
5. Hedge against inflation: Some private debt investments, especially those with floating interest rates, can act as a hedge against inflation. As interest rates increase, the borrower’s rate also rises, leading to higher returns for investors.