$4.4 trillion by 2028: Inside the global mortgage market

As property prices continue to rise across the globe, the private credit market is gaining momentum and is estimated to double in size to US$2.8 trillion by the end of 2028. On home soil, private credit provider Australian Secure Capital Fund (ASCF) says it’s doing things a little differently. 

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Private credit is a growing asset class worldwide, going from US$280 billion in assets under management in 2007 to US$1.5 trillion in 2022, reports show. Now, it represents about 12% of the global alternative investments market. 

And against a backdrop of rising property prices and a worsening rental crisis, the market is expected to just about double in size to US$2.8 trillion by the end of 2028, according to alternative assets research Preqin.

The latest Home Value Index from CoreLogic revealed housing values rose 0.6% in March – on par with February’s increase following an increase of  0.4% noted in January. Each of the capital cities and rest-of-state regions recorded a lift in values over the month (bar Melbourne and Darwin). Auction clearance rates remain well above late last year, with 71.8% of capital city auctions recording a successful result. 

“There’s a structural undersupply in the country of residential housing, which has been exacerbated by increased migration levels at the federal government level thereby increasing house prices,” Australian Secure Capital Fund (ASCF) director Filippo Sciacca says. 

“Historically, policy has looked to rectify that through stamp duty relief and first homeowner grants, but they don’t do anything to increase supply levels; they just continue to stroke demand. 

“In our opinion, unless the government starts to remove the red tape on housing approvals and release more land at the state level for housing through new large-scale releases or zoning changes, we think structural undersupply will continue, which makes mortgages a good place to invest right now.” 

But the executive directors of Brisbane-based boutique fund manager ASCF, Sciacca, and Richard Taylor, saw the potential of private credit early on. 

“I was a lawyer, then a property developer for a number of years, and I experienced the Global Financial Crisis and noticed there were a lot of mortgage funds in strife,” Sciacca says. “But also, there was a lot of demand for private credit outside of the banks – particularly from non-bank lenders. So, I first became aware of the asset class at that time.” 

Australian Secure Capital Fund (ASCF) director Filippo Sciacca (L) and Richard Taylor (R). Image source: Supplied

Taylor, a former financial planner and finance broker by trade from the UK, equally recognised the demand for private credit early on – about the 90s. But it wasn’t until 2015 when Sciacca and Taylor met up to take the next step. They applied for a retail AFSL licence for ASCF and established the fund in 2016, and now operate three pooled mortgage investment funds: ASCF High Yield, ASCF Select Income and ASCF Premium Capital. 

The funds earn a return for their investors by lending money invested with them to borrowers seeking short-term loans. All loans are secured by a registered mortgage over the borrower’s property. 

ASCF currently holds about $203.6 million in funds under management, with 2,130 current active investment accounts across all its retail funds. More than $56 million in distributions has been paid to investors since inception, with a targeted distribution rate of 6.10% to 7.75%. 

ASCF was created with a view to combat some of the issues the private credit sector faced during the GFC. 

“The biggest issue was liquidity,” Sciacca says. “Investor money was coming in for a 6-or-12-month term, but then invested in loans with a longer term. There was a mismatch between investment and loan timeframe.” 

At the same time, many mortgage funds during the GFC were investing heavily in construction loans, which faced risks like increased building costs and developers going under, as well as the associated market risks once the building was completed. 

ASCF sought to avoid those risks. The fund does not invest in traditional construction loans, and over 98% of its loans are for terms of 12 months or less. Its average weighted investment term is about nine months, Sciacca says, so there’s generally a match between the investments that come in and the term of the loan. 

“We offer investors terms of three, six, 12 or 24 months, but the majority of our investors are in six-and-12-month terms. So, we feel we’ve hit the mark in terms of being able to meet investor redemptions should they arise.” 

There’s more to lending than a set of loan documents.

Richard Taylor, director, ASCF

Even during COVID-19, the company met all investor redemptions. “We have a 100% track record,” Sciacca says. 

Another key differentiator is that ASCF operates pooled investment funds. 

High Yield offers a targeted distribution rate of up to 7.75% per annum, Select Income offers up to 7.25% per annum, and Premium Capital offers up to 6.75% per annum. 

Across all funds, the company’s average distribution rate is 7.1-7.2%. 

“Unlike peer-to-peer lending, where investors will invest directly into a single loan, investments are spread across the entire pool of loans contained in each fund and not lent directly to a particular borrower or against a particular security. It mitigates the risk associated with specific loans.” 

It also operates with a higher net interest margin in the event it needs to protect investors against losses. 

And that’s a double-edged sword as it allows the investment team at ASCF to be more stringent in it’s credit selection process. 

“If the net interest margin is slim, it means the fund manager is required to get that money out as quickly as possible, and the credit selection process for the loan may not be as rigorous as ours,” Taylor says. 

But the fund prides itself primarily on its transparency. 

“There’s more to lending than a set of loan documents,” Taylor says. “Any potential investor can go onto our website and view the loan details for every loan we have funded since inception.” 

This article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Seek independent advice and read the PDS and TMD available at ascf.com.au before deciding whether to invest in a ASCF fund. Past performance is not indicative of future performance and distributions are not guaranteed nor a forecast. Lower than expected returns may be achieved. Investment in the Funds is not a bank deposit and investors risk losing some or all of their capital. Withdrawal rights are subject to liquidity and may be delayed or suspended. Australian Secure Capital Fund Ltd ACN 613 497 635, AFSL & ACL 491 201. 

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