Navigating choppy investment seas

For many years, investors enjoyed global markets defined by strong growth and low inflation.

Then the pandemic and geopolitics changed everything and markets now face an era of higher inflation and much slower growth.

As a result investors are looking for proven investments that seek to withstand these prevailing headwinds.

In this context Australian commercial real estate (CRE) credit or hybrid investment options are being actively explored by local and offshore investors.

This environment of weak economic growth, high inflation and high interest rates offers a poor outlook for traditional asset classes like equities and bonds.

“Investors are searching elsewhere to find assets with good returns, hedged against higher interest rates. Real estate credit is one asset class that matches that brief,” says Wayne Lasky, executive chairman, MaxCap Group.

Investors are repositioning their portfolios towards alternatives and fixed Income. “At its core, CRE Credit is private credit backed by Australian and New Zealand real estate. It can offer reliable income with a singular focus on capital preservation. Commercial real estate credit, as a subset of private credit, has been helping investors,” says Bruce Wan, MaxCap Group’s head of research.

An examination of market conditions bears this out. Australia is in the middle of a severe housing crisis and faces a shortfall of hundreds of thousands of homes, driven by record migration.

Meanwhile, banks who are traditional balance sheet lenders, leveraging deposits to fund mortgages, have less appetite for real estate development. This is partly because they are required to hold more capital on their balance sheet to meet important regulatory capital adequacy requirements. Traditional bank lenders also have less appetite for retail and office assets due to shifts in the market as people increasingly work from home and shop online.

In this market, specialists in CRE credit, allocators of capital typically provided by third parties such as superfunds, pension funds, family offices and high net worth investors can step in and help fund the shortfall in housing and support other parts of the commercial property market where traditional lenders now have less capacity and flexibility.

“As the private CRE credit sector matures in Australia, it is expected to comprise a larger share of the lending market, as it does in Europe and North America, where banks only make up 50 per cent of the market, versus 70 per cent in Australia,” says Wan.

“We are relatively early cycle here in Australia compared to offshore and therein lies a scalable, sustainable investment opportunity.”

“As the transition occurs, the banks and non banks (fund managers) both play a critical role working hand in hand to perform a seamless transmission of credit to credit-worthy borrowers and sponsors.”

“With higher inflation and high interest rates comes rising uncertainty and a world that’s challenging for equity and bond returns,” says Wan.

“Passive equity owners have no shock absorbers, they feel every bump in the road in their hip pocket. Whereas credit investors are protected from volatile price cycles. Private credit provides a natural hedge in this environment,” he says.

“When the Reserve Bank raises interest rates, returns on assets with floating rates such as commercial credit rise. When equity markets are beset by sluggish earnings growth and volatile share prices, CRE credit or fixed Income can offer improving returns, lower volatility and reduces a portfolio’s correlation with equity returns,” Wan says.

“Fixed Income performs a dual role not often seen throughout history as it increases returns and lowers risk.” Wholesale investors can access CRE Credit investment opportunities via The MaxCap Investment Trust (MIT), MaxCap’s flagship investment product which comprises a diversified portfolio of loans with sound liquidity profiles.

It focuses on two options a first mortgage pool or high-yield credit opportunities. Depending on an investor’s risk appetite these yield between 5 per cent to 8 per cent above the RBA cash rate respectively, currently offering 9-12 per cent net returns to investors. Another benefit of MIT is that there is no tax leakage.