Global law firm Herbert Smith Freehills has released its Real Estate Sector Insights for Q4 2024 report. It emphasises the significance of private credit and its emergence within Australian Build to Rent and real estate financing.
The insights show that amid tightening lending standards from traditional banks, private credit is filling critical funding caps across the sector. The rising private credit sector will therefore play a crucial role in tackling the housing supply crisis.
Build to Rent is among the key sectors that are strongly benefiting from private credit, which is playing a pivotal role in financing Australia’s Build to Rent sector. Developers are exploring these funds to meet growing demand for affordable housing, while sidestepping traditional hurdles like pre-sale requirements, according to Herbert Smith Freehills.
Industrial and logistics and boutique residential developments closely follow Build to Rent as the main industries utilising the benefits of private credit.
Developers, investors, fund managers, and brokers are now sourcing loans from non-bank lenders because of this shift. While non-bank loans are more expensive than bank debt, these higher costs are offset by faster decision-making, higher loan-to-value ratios and more flexible terms.
Herbert Smith Freehills states that bigger private credit loans are filling gaps in construction funding to get developments off the ground and allowing developers to acquire further sites to expand their pipelines.
The sector has grown at a 23% compound annual growth rate between 2015 and 2023, expanding from less than $50bn to be now worth $200bn. Coupled with this rise has been the banks’ shrinking share of commercial property lending – from 10% of their assets at the time of the GFC to 5.5% now.
After the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry, banks became more conservative in their lending practices, particularly for riskier projects, according to Herbert Smith Freehills.
This shift created a ‘vacuum’ in the market, enabling private credit providers to offer tailored solutions with faster approval times and fewer constraints than traditional lenders.
Some of the main benefits of private credit include income generating opportunities, portfolio diversification, and capital preservation.
According to the insights, private credit has become a popular choice for investors, as it allows them to diversify their portfolios and gain high and compelling yields without the volatility of equity and capital markets.
Private credit can enable property developers to complete housing schemes more quickly, and it can be tailored to differing needs, such as to support affordable housing projects. Private credit markets have shown they remain strong even when the economy is uncertain.
Private credit lenders manage risk through strong asset backing, careful borrower selection and having a diversity of borrowers from different sectors and geographies. The asset-backed nature of these loans provides an added layer of security, even in volatile markets.
Herbert Smith Freehills believe that the two most profound factors behind the increasing popularity of private credit are speed and the capacity to do higher LVRs.
Loans can be approved in as little as three weeks, which is a lot quicker than a bank. Non-bank loans are also getting bigger – the average loan size now sits between $10m and $20m.
Additionally, private credit is uniquely positioned to address Australia’s housing crisis by unlocking capital for developments that might otherwise stall under traditional financing constraints.
With a significant housing shortfall and demand projected to grow due to increasing immigration and population growth, developers require flexible and responsive funding options to deliver new housing schemes.
Private credit funds, which often operate with greater agility than banks, enable the rapid deployment of capital to housing developments, including Build to Rent developments and essential affordable housing.
By bridging funding gaps and supporting innovative housing solutions, private credit is directly contributing to the expansion of Australia’s housing stock, alleviating pressure on affordability and availability in a strained market.
Herbert Smith Freehills concludes that by ensuring a steady flow of capital to critical infrastructure and housing projects, private credit is playing a key role in mitigating the risks posed by the housing affordability crisis and supporting Australia’s urban growth.
