Property finance: The perils and profit in private real estate credit

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Private credit for commercial real estate has never been stronger. It’s also running into trouble. “All of us need to be eyes wide open and alert. It is real estate and it is credit. Let’s not misprice the risks.”

Already a subscriber?Duncan Clubb, the national leader for business restructuring at global accounting and advisory firm BDO, has an increasing amount of work from non-bank lenders with problem loans to residential developers.

Australia’s private real estate credit is a growing, $75 billion market, which currently accounts for about 16 per cent – compared to the banks’ 84 per cent - of the nation’s $447 billion in commercial real estate credit, according to Foresight Analytics. No question about the current stress in domestic residential development lending; it’s widespread. In fact, the resolution of the problems are fundamental to rebuilding affordable housing supply.BDO’s Clubb says the non-banks increased their exposure to residential development as the banks reduced their appetite.

MA Financial’s managing director, asset management, Cathy Houston, says few bank or non-bank residential development loan portfolios would not have defaults. Nevertheless, all expect the sector to grow, in fact near double, to $146 billion and 22.7 per cent of the total CRE lending by 2028, according to Foresight Analytics.“Non-banks make up 50 per cent of the commercial debt market in the US, so we are four to five years behind,” he said.

“The defensive nature of private debt in the overall real estate stack offers enhanced safety, while the floating rate nature of returns provides a positive hedge against inflation.”Andrew Schwartz, the managing director of Qualitas – an alternative investment managerand a leader in the sector with over $8 billion in funds under management – is a veteran of real estate credit.

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