As Bruce Wan, Head of Research for MaxCap Group, explains, this makes a compelling case for more investor attention and greater portfolio allocation in 2025.

Looking into our crystal ball, the investment outlook appears as hazy as ever.

While the most pressing concerns of past years – weak growth, high inflation and rising rates – appear to be gradually unwinding, the world is now confronted with new sources of economic uncertainty, notably with a new policy direction in the US, with escalating risks of trade discord and tariff barriers between China and the United States – the world’s two largest economies.

Already, economists are re-assessing their outlooks for the global economy, reducing their growth expectations as increased tariff barriers look set to inflate import prices, impede the flow of commerce, and reduce economic activity. Undoubtedly, there is a lot of uncertainty for investors, as they contend with this Portfolio Puzzle for 2025… Where do we deploy our capital to find pockets of sustained growth, resilient returns, and genuine diversification?

For many cross-border investors, this search is leading them to Australia, which remains an island of stability in a chaotic world. Moreover, many investors are still being drawn into private credit, for its consistent returns and its increasingly vital role in any well-diversified investment portfolio.

In Australia, this is the market segment that funds the acquisition and development of commercial real estate, which includes office buildings, shopping malls, hotels, distribution warehouses, and residential apartment blocks.

For many years, commercial real estate lending has been dominated by a few major banks. However, banks have been structurally retreating from this space, as the Australian regulator steadily tightened capital reserve ratios and increased risk weightings for real estate development, in a bid to reduce the systemic and contagion risks presented by the banks during the Global Financial Crisis.

Consequently, we are seeing a progressive shift from bank to non-bank lenders in Australia. This process has many years to run, in line with the similar adjustment that has already occurred in North America and Europe. In other words, there is a long runway of growth for non-bank lenders from here.

This structural shift to non-bank lending is a positive development from many perspectives. For regulators, a more diverse set of lenders helps to reduce the volatility in the credit cycle and steadies the economy during a banking crisis. For borrowers, there is great value in having greater security of funding, more flexibility on loan terms like leverage ratios, interest coverage and pre-sale requirements, even if it means higher interest margins. For investors, most importantly, there is improving access to a highly profitable set of private credit opportunities, previously only available to a cosy banking oligopoly.

Simply, investors are here for the better risk-adjusted returns in commercial real estate credit, compared to many other traditional asset classes.

The returns from commercial real estate credit have been firm and resilient over a long period of time, sustained through diverse periods of strong and weak economic growth, and high and low interest rates. The mechanics of this resiliency is simple. Robust immigration into Australia across many decades has sustained housing demand regardless of the economic cycle. Meanwhile, investment loans have shown resilient returns across many interest rate cycles, as lenders nimbly pivoted between fixed- to floating-rate loans as rates fluctuated.

For some investors, lending for construction is sometimes associated with a higher degree of risk. However, the realised outcomes in Australia over the past 18 years have been far more benign, in sharp contrast to similar construction lending markets in Asia, Europe and North America. In Australia, this is a market segment that has been very strong on capital preservation.

The reasons for this are often underappreciated. Loans in Australia are mostly conducted with full recourse, and borrowers may be obliged to cover any capital shortfall from their other asset holdings. Asset values in Australia have been very stable, especially compared to the bigger price corrections seen abroad. In this context, default rates have been very low historically. Even in default, lenders have a very strong capacity to recover any outstanding amounts from borrowers.

Altogether, Australian commercial real estate credit as an asset class has a favourable mix of risks and returns, one that is demonstrated over many cycles and one that compares very well with other traditional asset classes. This sustained performance has been realised through the recent pandemic when weak growth and high rates have brought widespread losses to other asset classes. Indeed, this highlights the benefit of private credit as a vital portfolio stabiliser, at a time when diversification is getting harder to find.

The Australian outlook is looking a little better in 2025, with market expectations of slightly higher growth, modestly lower inflation and hence gradually lower rates. This is in the context of a global market outlook with more geo-political turmoil and escalating trade tensions, which causes a lot of investor anxiety about the state of the world and where to find their target returns.

In our view, there continues to be a compelling case for private credit, particularly for Australian commercial real estate credit. While interest rates are likely to drift a little lower in 2025 and 2026, they are still consistent with a higher-for-longer scenario and still expected to sustain resilient credit returns. Meanwhile, the turning point for rates is likely to unleash stronger borrower sentiment, which should support some gains in lending volumes ahead.

By sector, we hold the strongest conviction in residential development. Robust population growth in Australia continues to outpace many parts of the developed world, and also the pipeline of new housing supply. We foresee persistent undersupply of housing for several years ahead, whether it is housing for sale or for rent, from inner-city apartments to urban-fringe land subdivisions.

For other sectors, the outlook is looking brighter. For the first time in several years, we are seeing a concerted rebound in commercial asset prices. For office, the structural erosion of demand from working at home is finally moderating. For retail, the long-running shift from in-store to online retail is also running its course. Alongside the expected decline in interest rates from 2025, there is a broadening suite of tailwinds to support a firmer cyclical recovery in asset prices.

Not surprisingly, we continue to see strong investor appetite for Australian commercial real estate credit. For many private investors, there is a choice of investing on a deal-by-deal basis, or via a consolidated fund structure. The most obvious benefit from an open-ended fund comes from its diversification and immediate deployment, as investors may sit across a pool of 50+ loans, which goes a long way to smooth out uneven cash flows. Additionally, there can be liquidity benefits in a fund vehicle, as a larger loan pool is able to sustain monthly redemption windows.

The other big investor consideration relates to manager selection. Certainly, there is more capital competing for deals. Increasingly, we are seeing new start-ups looking to write their first deal or managers branching out into private credit for the first time, without the technical skillset or the appropriate local market experience needed to appropriately price a deal or manage the risks. In this market, deep origination capacity and track record are absolutely vital. With a stronger transaction pipeline, established managers can afford to be more selective on deals, pricing, sectors and sponsors. This allows stronger managers to be far more patient and disciplined on deployment.

Looking ahead, 2025 is shaping up to be another interesting year. For many investors, looking for stability in a volatile world, Australian commercial real estate credit remains an attractive solution to a difficult portfolio puzzle. There is still persistent demand for real estate amid robust population growth. There is still room for growth in lending volumes as banks retreat and interest rates ease. Moreover, Australia remains a highly desirable destination to live, work and invest, given the strong rule of law, stable governance, high-quality educational institutions and an enviable quality of life. Altogether, the commercial real estate credit investment outlook remains highly compelling, given a long track of robust, resilient returns across all market conditions.

Reflecting on 2024, it was undoubtedly the year where private credit rose to the fore, as the sector performed with distinction against a challenging backdrop of high inflation, elevated interest rates and geopolitical volatility.

Global institutional and private wealth investors voted with their capital – funnelling an incredible weight of money towards the sector as they sought to gain the highest possible return for each unit of risk. Importantly, commercial real estate (CRE) credit managers such as MaxCap were the major beneficiary of this capital.

MaxCap is exceptionally proud of the performance and growth of its flagship evergreen vehicle, the MaxCap Investment Trust (MIT). In the 12 months to 31 December 2024, the MIT First Mortgage returned 11.75% net¹ to investors. This compelling return has been achieved in the context of maintaining the highest credit standards and conservative lending parameters (average 62% LVR across the portfolio).

Monthly liquidity, consistent distributions and sharing of establishment fees have clearly resonated with investors who are seeking to benefit from the diversification and liquidity advantages of the MIT’s access to a c.$1.7bn pool of loans, versus traditional evergreen real estate equity funds or single asset credit opportunities.

The MIT finished 2024 with over $750 million in funds under management, spread across a diversified portfolio of 67 loans. The MIT is on track to surpass $1 billion within the first half of 2025, with the product attracting strong interest from both institutional and private investors domestically and abroad, while also gaining presence on a number of eminent Australian wealth platforms in order to access the deep pool of local sophisticated private wealth.

MaxCap had a record year of deployment, originating a significant velocity of new loans. MaxCap also successfully managed through repayments of 93 loans during the same period, achieving a weighted average return in excess of 12% IRR. This significant transaction volume reflects our large origination capacity (40+ investment team members across Australia and New Zealand) and ability to build a deep deal pipeline, even amidst heightened competition.

Throughout the year, MaxCap’s wider loan book has demonstrated strong resilience and delivered solid returns. Our risk management framework, enhanced by leveraging our partner Apollo’s global experience and best practices, has ensured that any potential or realised impairments remain minimal, reflecting early and prudent intervention.

It’s important to acknowledge the general market challenges faced throughout 2024 and as we move into 2025. Investments in CRE credit are not without risk, but the key is to allocate to an experienced manager in a diversified manner. However, even the strongest underwriting standards can be tested by prolonged market headwinds and loans will occasionally require active asset management. What is important is that these actively managed loans remain a small minority of the portfolio – which has been our company’s experience to date and is our expectation moving forward.

Our risk adjusted returns remain among the most compelling investment opportunities in the APAC region. MaxCap believes that achieving outsized returns hinges on intensive and disciplined management and ensuring that GP’s have the necessary framework to deploy, manage and recycle capital efficiently. The creation and management of the MIT is the culmination of 18 years’ experience in the sector. Our key management focus:

• Sector Exposure: MaxCap has deep experience and expertise in all real estate classes and can execute with confidence across all sectors.
• Geographic Diversification: While our loan portfolio will maintain strong exposures to Greater Sydney and Melbourne, our investment guidelines support the origination of loans across Australia and New Zealand, supported by our staff in our 5 offices across both countries.
• Borrower Concentration: Over its 18 years of trading, MaxCap has cultivated strong relationships generating repeat business which is often a virtue in dealing with proven sponsors. This is tempered by policies designed to ensure no overexposure to a single client with strict concentration limits.
• Duration: The average loan term in the MIT portfolio is approximately 18 months, providing natural underlying liquidity. This structure also provides the flexibility to recalibrate the portfolio in a timely manner in response to evolving market dynamics.
• Valuations: MaxCap is committed to accurate and conservative loan marking. Given the monthly liquidity available in the MIT, valuations of the loan portfolio are conducted monthly and in accordance with industry standards and regulatory requirements. Importantly, all valuations are reviewed and tested via external audit, ensuring transparency and rigor in the process.

Over the past four years, investors have experienced the most significant shift in base rate settings from expansion to contraction ever recorded which has resulted in deeply embedded (and sometimes neglected) risk within global economies and markets. We are seeing the most sophisticated global investors continuing to both re-allocate and increase their allocations to private credit, incorporating CRE credit as a meaningful component to manage the volatility in their portfolios and deliver higher returns for each unit of risk.

As we move further into 2025, it is an opportune time to review the market landscape, consider the key investment themes and chart a course for the year ahead.

The most pressing concerns of the past year – weak growth, high inflation and rising rates – appear to be gradually unwinding, though uncertainty remains as to what effects (be they positive or negative) a new policy direction from the United States and rising tariff barriers on global trade may have on global economies.

In 2025, the Australian economy is set to lift from its cyclical low, with stronger capital markets and modest cuts to interest rates. As always, there are multiple risks to the outlook, such as a slower Chinese economy weakening commodity demand and inflated asset values leading to a share market bubble.

Meanwhile, real estate markets are set to move to different cyclical beats in the year ahead.

With interest rate relief not eventuating and diminished affordability, housing markets slowed markedly in late 2024. The residential market is set for a cyclical rebound ahead, in the face of relentless demand pressures from sustained population growth, as lower rates in 2025 revive buyer sentiment and partially restore affordability.

Commercial markets started a cyclical recovery in late 2024, as capital values lifted modestly across the board and investors returned, albeit on an opportunistic basis. The longstanding headwinds for the office and retail sectors – working-from-home and shopping-from-home – are slowly subsiding. The recovery is set to continue in 2025, albeit at a slow and gradual pace.

For investors seeking clarity, in our view the focus should remain keenly on well-diversified, compelling risk-adjusted returns.

Considering key indicators, we see interest rates declining somewhat, but the curve remaining elevated into the medium term. Major domestic events such as the impending Federal Election could drastically influence this view moving forward. Elevated interest rates will continue to hamper real estate equity investors, and transfer wealth from borrowers to lenders.

Risks remain present in real estate credit, especially with lingering concerns about builder failures and developer liquidity. Best in class CRE credit managers are better equipped to address these risks with a specialised skillset to originate loans, evaluate credit risks and oversee delivery of projects in a timely manner.

There is significant value derived from diversification. Allocating to private credit in 2025 will likely add to portfolio returns and reduce portfolio volatility. Similarly, allocating to a pool of real estate loans can markedly smooth out cashflows and diminish the risks and impacts of infrequent single loan defaults.

After almost two decades of successful operations, MaxCap continues to evolve, leveraging our institutional funds management platform to the further benefit of our valued clients. By investing heavily in our operational, investment and risk capabilities, we’ve positioned the business to continue to deliver for investors into the future.

We will be sharing these continued improvements with investors over the coming year. We thank you for your continued support and look forward to further success in 2025 and beyond.

How would you describe the current real estate credit market in Australia, and what have been the trends in the past 12 months?

Bruce Wan: We are seeing a very strong real estate credit market in Australia at the moment. From an investor’s perspective, it is a challenging environment in various asset classes, with a lot of stagflation across the developed world, and rising interest rates. That creates a difficult environment for equities and bonds, but real estate credit is holding up globally quite well, especially in Australia. We expect this to last for the foreseeable future.

As for trends, we are witnessing a migration boom in Australia at a pace we have never seen before. That has fuelled housing demand, driving an upswing in residential markets that you might not expect in an environment of rising interest rates. There is strong demand for housing and various credit solutions, encouraging more investors into the space.

Wayne Lasky: Zooming out, allocations to private credit backed by commercial real estate in Australia are increasing quite dramatically. It is important to understand that regulatory intervention and the structural dislocation of the banks that happened after the GFC and permeated Europe and North America really only commenced in Australia in 2017, so we are early in the cycle. Less than 15 percent of commercial real estate lending is done by the non banks, so the growth will be immense and the size of the investible
universe vast.

Fund managers like ourselves currently have too many quality assets to allocate to and not enough capital. Allocations are increasing but cannot keep in step with the market opportunity, and that structural shift away from bank lenders being profoundly felt by borrowers.

How does that Australian environment compare with the broader global market?

BW: When we look domestically and get concerned about the below-average pace of economic growth, we have to remember that Australia is outperforming the global market. We are not looking at a Europe-style recession and there are not the recessionary concerns felt in the US.

Population growth in Australia means there is still a lot of demand, and we are also looking at a trade surplus at a record level, exporting much more than we are importing. The sheer volume of raw commodities that we export to China, Korea and Japan is holding up the economy well.

Rising interest rates create positive tailwinds for real estate credit as a hedge. When rates go up, returns in real estate credit also go up, and there are not many asset classes offering that hedge right now.

There has been this wholesale reallocation of capital into real estate credit globally. Whereas other markets are turning some of that attention into office and retail equity, where there has been quite dramatic repricing, the Australian markets have not repriced to the same extent. Here, there is not that distraction of people buying value office because it has reached the bottom.

WL: Taking a different lens, I think of this as being about timing. In Australia, there are fundamental structural and generational trends underpinning the opportunity to invest in Australian commercial real estate credit and generate outsized returns. That creates predictable, reliable income with an absolute focus on capital preservation, and that opportunity is scalable and sustainable.

This is somewhat different to what is presenting in North America and continental Europe right now, where there are some challenges at a macroeconomic level that present opportunities subject to what the entry price might be on any given trade. It comes down to good timing. We are talking about something very different, which is not subject to timing but is longer term and is something that large European investors are now starting to actively engage in.

What should LPs consider when assessing managers in this space?

WL: Track record is obviously the starting point, and that is not just numbers on a page but also reputation in the market, which is sometimes difficult to assess from thousands of miles away. Still, understanding who is first choice in the market is important. Real estate credit managers need to originate loans from borrowers, so LPs should be looking at how much repeat business they are getting as that tells you quite a bit about a manager. It also helps a manager manage risk if they have a deep appreciation for the sponsor.

I would look carefully at specialisation and embedded local market expertise: what type of infrastructure they have, how close to the asset they are on the ground and how deeply they are rooted into the ecosystem.

BW: Some of that is captured by the umbrella of an institutional platform, looking at whether a manager is doing things as an investor would expect of an institutional platform. The sourcing platform is very important – having people on the ground and being first port of call for people sourcing finance.

What are the most compelling aspects of the asset class in Australia today?

BW: Certainly, front and centre would be that interest rate hedge. The world has got used to near-zero interest rates and is a bit shocked to see more historically normal rates, so real estate credit is attractive.

At the same time, higher interest rates are pushing the attractiveness of other asset classes down, so where there is a lot of concern about equity markets and earnings growth, we are insulated from that. For investors looking at global portfolios, it is about looking at returns versus equities, bonds and direct real estate. Most pension fund returns are highly correlated to equities and have almost zero correlation to real estate credit. So, in a world where it is difficult to find growth and find that hedge, real estate credit is standing out.

WL: The size of the Australian market opportunity surprises European investors and there is zero tax leakage in real estate credit with experienced managers. And, critically, banks continue to retract in this market – they are not competing. The opportunity to engage in high-quality underwriting with strong risk-adjusted returns at scale is an absolute feature today.

What appetite do you currently see from institutional investors for this strategy? Why does Australian real estate credit make a good addition to global portfolios?

BW: We are still seeing growth in Australia compared with other parts of the developed world. Investors from the UK and Germany are looking to Asia-Pacific for growth, but some of the other markets in Asia are going through challenges. So, when people have set aside money for Asia-Pacific, they are finding it difficult to deploy in East Asia. There are a lot of geopolitical concerns holding people back from going more deeply into different parts of Asia. It is not for us to comment on those concerns, but we do witness investors seeing Australia as a safe haven and targeting their Asia-Pacific allocations here.

WL: Investors are telling us that they have seen the largest European investors in Australia succeed, and in Australian real estate credit specifically, which was alongside real estate equity for a significant period of time. They recognise the value of a pivot to real estate credit at this point in the cycle.

They also recognise that Asia-Pacific is not a homogenous marketplace and Australia is one of the core markets in the region that is a safe entry point.

Finally, what is the outlook for Australian commercial real estate credit, and what do you expect to be the big themes in the next few years?

BW: I would point to three themes. First, we are seeing a population boom in Australia create a dramatic undersupply of housing and a rental boom. People complain about a lack of affordable housing and the only real way to solve that is to build more homes, which requires more capital.

Second, we now have a more normalised interest rate environment, so rates will be higher for longer. What worked when interest rates were really low will no longer work, so investors need to make that dramatic and permanent shift, with a key solution being commercial real estate credit.

Finally, investors are making that switch from equity to credit, particularly in real estate, for legitimate reasons. If you own real estate, you have no shock absorber and you feel every bump. When you are the credit provider, you have many more buffers so you can deliver more consistent, resilient returns.

Over time, we expect all three of those trends to drive more capital into real estate credit in Australia.

WL: In addition, my sense is the banks will continue to retrench. MaxCap as a fund manager and non-bank lender is complementary to the banks, partnering with them to offer a seamless transmission of credit to credit-worthy sponsors and assets. In an asset class like real estate, which is heterogeneous, you need to have multiple solutions for each asset at different stages of its life cycle.

I foresee pension funds, insurers and high-net-worth investors will increasingly seek out the opportunity in Australia based on risk-adjusted returns that are too strong to ignore. Our vision is to ensure we have a breadth and depth of capital across the real estate credit spectrum in the country, up and down the risk curve, to allow us to lean into the market and allocate to where we see the biggest need and the optimal returns for investors.