Private Credit Lenders Gain Ground in Australian Commercial Real Estate Market
Private credit lenders are making headway in the Australian commercial property market, offering borrowers alternatives as banks become more cautious about high-risk loans in the face of an economic slowdown caused by elevated interest rates. This shift is largely due to growing demand from institutional investors, including pension funds, sovereign wealth funds, and insurance firms, who are seeking attractive returns in a challenging equity market, particularly in the struggling real estate sector.
Australian real estate specialist Qualitas, whose backers include the Abu Dhabi Investment Authority, has significantly increased its funds under management to AUD 8 billion (USD 5.07 billion) since mid-2022, with almost half of the growth occurring since June this year. Similarly, US-based PGIM Real Estate plans to deploy an additional USD 1 billion in Australia over the next few years, according to Steve Bulloch, the head of Australian real estate at PGIM.
While non-bank lenders still represent a small fraction of the financial assets at around 5% in Australia, compared to the global estimate of 50% by the International Monetary Fund, their presence is steadily growing. Non-bank lending in Australia reached more than AUD 600 billion in assets last year, including lenders focusing on retail credit.
These alternative lenders are expanding their activities in the residential and commercial construction sectors as traditional banks reduce lending or withdraw completely, as noted in a March report from the Reserve Bank of Australia. This presents an opportunity for borrowers who may face higher costs, but also benefit from the added security of loans secured against tangible assets such as condominiums or warehouses, often with a 30% to 40% equity buffer.
Paul Notaras, executive director at Barings Real Estate Australia, highlighted that investors can expect returns ranging from 9% to 11%, making non-bank lenders an attractive source of credit at a time when banks are scaling back lending to segments of the property sector traditionally seen as high risk, such as construction. This cautious approach by banks has resulted in a surge in insolvency filings among construction firms, with 2,213 cases reported last fiscal year, the highest on record since 2013.
New lending for commercial properties by major banks in Australia has only seen an average quarterly growth of 1% since June 2022, reflecting levels last observed during the pandemic, according to data from the prudential regulator. Banks have become more risk-averse and now prioritize blue-chip property firms, said Andrew Schwartz, co-founder of Qualitas. This change in approach has made it increasingly difficult for borrowers, pushing them towards alternative lenders.
While banks are hesitant to lend more than 40% to 45% against the value of build-to-rent residential projects, private lenders are willing to go as high as 65%, noted Barings’ Notaras. However, property-related bond issuance remains at record lows, leaving many unrated mid-market borrowers unable to access funding through bonds. Retail and office spaces continue to face challenges due to higher interest rates, declining prices, and changing market dynamics linked to remote working and online shopping.
Conversely, non-bank lenders are focusing on Australia’s underdeveloped residential market, particularly in the emerging build-to-rent sector, and the resilient market for warehouses and industrial properties. Qualitas and the Abu Dhabi Investment Authority recently announced a AUD 1.45 billion partnership that will primarily target the residential sector.
In conclusion, the rise of non-bank lenders in the Australian commercial real estate market is providing borrowers with viable alternatives as traditional banks retreat from riskier loans. With growing interest from institutional investors and the potential for attractive returns, non-bank lenders are expanding their footprint in the industry, particularly in residential and commercial construction. While banks remain cautious, these private lenders are stepping in to fill the gap and offer credit to sectors historically seen as high risk.
