While rate cuts have started in New Zealand, Australia is very late to the stimulus party. Dashed expectations for 2024 rate cuts have delayed this recovery. We see modest rate cuts in 2025 as the catalyst for a firmer upswing ahead.

Investors are still voting with their feet, pushing further into private credit, to enhance portfolio returns and diversification. Meanwhile, a private equity real estate turning point is unfolding, as more investors return with greater confidence, looking for value.

Despite modest rate cuts ahead, we are still in a prime window for commercial real estate debt. The outlook is well supported by persistent housing undersupply, the improving construction outlook and an enviable blend of risk-adjusted returns.

Meanwhile commercial real estate markets are moving into a more durable cyclical turning point, even ahead of meaningful declines in borrowing costs. The pace of recovery will likely differ across markets, driving a clear need for astute sector selection.

The nascent private credit sectors in Australia New Zealand are not well understood. There are plenty of popular misconceptions regarding how the market works, the degree of investment risks and the consistency of returns delivered over time.

For global investors, the small size of the local economies often draws comment. However, these markets are highly developed, very transparent and well poised for robust growth, particularly as borrowers continue to pivot from bank to non-bank lenders.

There have been a lot of headline news about construction and financing risks. That said, the realised investment risks remain exceptionally low, demonstrated over many years and market cycles. This sector remains attractive for its positive mix of risk and return.

There is a widely-held notion that private credit lacks transparency, and this may draw more regulatory attention with concerns over financial system risks. Industry leaders can address this with a higher degree of disclosures over operations and performance.

The apparent popularity of private credit is bringing new capital and managers. New operators will find conditions in the sector very challenging. Disciplined deployment is the key, and this needs deep origination teams and strong internal resources to manage risks.

In this market environment, finding the right private credit manager and partner is the key. This would go a long way to getting clarity on how the sector works and the risks involved Accessing the right skill set for this sector is vital to success.

For private real estate investors, it is important to take a knowledgeable guide wherever you go, not just to find the best hangout spots, but more to access the key players, understand the micro market trends and source the best local deals.

A key part of success in real estate is knowing where to invest, in which city, in which suburb and down to which street. In markets with widely divergent performance trends, good market and asset selections can create a lot of alpha returns.

Real estate deals – much like dating – are best done offline and in person. Local representation is a huge competitive advantage against fly-in, fly-out competitors. Boots on the ground are essential for any credible deal-sourcing platform.

While it is fun to hear from our local guides, there is a serious message here. In a market with a lot of new managers, many outfits are not well resourced on the ground. Deep, diverse origination teams are essential to deploy well in this market.

There has been a big deterioration in housing affordability in 2023 and 2024 comparable in severity to the early 1990s and the mid 2000s. This time, affordability has weakened with lower real household incomes and higher mortgage rates.

Housing affordability is not a new issue, given the enduring popularity of homeownership. Over time, buyers have keenly pushed up prices by bringing more income (from a second wage earner) or more debt (with structurally lower interest rates).

In this cycle, we have seen an unusual source of pricing resilience in the housing market, as buyers brought more equity to the table, potentially from family sources (the so called Bank of Mum and Dad) or from other pools of household wealth.

At a local level, affordability measures are especially overstretched in the more desirable parts of Sydney, Melbourne and various beachside hotspots. In these markets, pricing more reflects desirability, rather than any affordability constraints.

Given these challenges, there is a turning point for affordability ahead, particularly with the expected peak and decline in mortgage rates. Over time, buyers will also economise via shifts to more affordable apartments, suburbs or even cities.

For investors and lenders, there are predictable shifts in demand patterns ahead, especially in an environment of considerable housing undersupply, and a need for would be buyers to manage their entry into the housing market.