As commercial real estate private credit evolves, clarity becomes a competitive advantage 

As private credit matures, investors face an expanding  range of structures and strategies. The managers who stand out will be those who communicate risk and opportunity with clarity.

In recent years, commercial real estate-backed private credit has enjoyed explosive growth.

Offering attractive income and stability, the asset class has moved from investment niches to mainstream portfolios. As the market matures, however, attention is shifting toward governance, transparency and risk management.

In June, the Australian Securities and Investments Commission (ASIC) called on credit managers to assess current practices against a list of ten principles for being responsible and transparent stewards of other people’s money, and “to lift standards where needed.”

“The sector is facing its first real test,” ASIC wrote in a recent call to action.

The market is maturing

In Australia, the market for private credit has expanded to $234 billion, growing 21% each year over the past decade, according to estimates by EY-Parthenon. A growing number of specialised credit funds are now competing for investor capital, and drawing more money from wholesale investors, family offices and institutions.

“Private credit, done well, has a valuable role to play in the Australian economy,” a report for ASIC stated last year.

As the competition intensifies, managers are increasingly seeking ways to differentiate themselves. As a result, a wider range of credit products, structures and strategies has emerged, from direct construction loans to semi-liquid funds and convertible debt notes.

An ASIC review found that disclosure quality and transparency vary considerably across the sector. The review highlighted concerns around complex structures, opaque valuations and unclear disclosure in parts of the market.

Regulators are continuing to assess the risks emerging within a rapidly growing sector – which explains ASIC’s recent push for scrutiny.

“What we’re seeing now are the rattles of a maturing market,” says Jeremy Urbach, Partner and Chief Financial Officer at IDA, a leading Australian specialist real estate private credit and investment manager.

“There are more people in there; there are fewer places to hide, and we’re also finding ourselves in a different part of the economic cycle: it is harder out there.”

Still, Urbach says, demand for real estate credit remains constant across cycles, so there are always good opportunities for credit managers who understand how to navigate more volatile ones.

Bucking the trend to complexity

IDA was founded 16 years ago after an exodus of foreign banks left a gap in Australia’s wholesale lending sector. Its ambition was to meet the need for more flexible capital solutions for developers who build the critical infrastructure and housing for our growing nation. Over time, the business has established a focused presence in Australian commercial real estate, private credit and investment management.

While some managers have expanded into increasingly complex, intermingled strategies, IDA has maintained a pure investment approach focused on its core areas of expertise: debt, equity and joint ventures.

“We are capital providers to the real estate development sector. That is all we do,” says Urbach. “We focus on areas where we have deep experience and understanding.”

The business has two arms: One provides private equity for land and community development. The second provides private debt for medium to large real estate projects, from luxury apartments to retirement villages and shopping centres.

“Many managers combine different strategies to pursue higher returns for their products. We’ve decided to go the other way,” says Urbach.

“We have kept our strategies specific. They are clearly delineated to not obscure the risk investors are taking.” – Jeremy Urbach

This approach reflects IDA’s belief that clarity around strategy and risk is valuable in a more mature market.

Pay attention to the underlying asset

Global economic uncertainty and changing market conditions continue to influence investor sentiment, but clarity is especially needed when markets are spooked by gloomy news, says Urbach. Some investors have begun to fear that private credit markets, long seen as a defensive portfolio option with good returns, may be headed for a crisis.

In the US, two large debt-funded retailers, Tricolor and First Brands Group, went bankrupt late last year. The war in Iran still weighs on the global economy, and so does the uncertainty over AI. In Australia, higher interest rates have increased financing pressure for many borrowers. In that environment, distinguishing between headline concerns and underlying asset performance becomes increasingly important.

Urbach agrees that current markets are more challenging than they have been in years. However, he cautions investors to pay attention to the underlying asset they invest in: property, distressed debt, a start-up venture.

“The private credit market encompasses a wide range of asset types and risks. There are so many different sectors and strategies,” he says.

Market fundamentals remain highly sector-specific. Challenges in US consumer businesses differ materially from those affecting Australian residential development. Down under still grapples with a housing shortfall of at least 250,000 homes, according to the Housing Industry Association. Recent changes to negative gearing and taxes do not apply to commercial property developers, whichmay create a structural advantage, some industry experts say.

Direct communication becomes particularly important. “We’re at the coalface through our land and community creation investment strategy, whichprovides us with direct exposure to market activity and data. That can provide valuable context when speaking with investors during a period of uncertainty,” says Urbach.

Honesty goes a long way, says Urbach, echoing ASIC’s call to action.“As private credit markets mature, trust will increasingly be built on transparency,discipline and consistent communication. Good outcomes are not defined byavoiding challenges altogether, but by identifying them early, communicatingthem openly and demonstrating a clear framework for managing risk – particularlywhen market conditions become more difficult.”

Learn more at ida.com.au

Views expressed are those of IDA Securities Pty Ltd, ACN 155 991 585 AFSL 418 895. Intended for wholesale investors only (within the meaning of Corporations Act 2001 (Cth). For general information only. Does not constitute financial product advice or a recommendation to invest. Independent professional advice should be obtained prior to making any investment decision.

---

Want to see more Forbes articles on your feed? Tap here to make Forbes Australia a preferred source on Google.

Look back on the week that was with hand-picked articles from Australia and around the world. Sign up to the Forbes Australia newsletter here or become a member here.