An asset class built to survive a crisis
There's a $60 billion funding gap in the property market and it's an opportunity that Wayne Lasky is pioneering at MaxCap Group. This is good news for investors.
The commercial real estate debt market is still early in its cycle but MaxCap has been well ahead of the curve to provide debt facilities for the real estate sector. Commercial real estate debt (CRED) is a relatively new financial investment class. Borne out of the GFC, this asset operates with strong yields and risk-adjusted returns - it's a fixed income investment with a property twist.
The loans act as fixed income for investors and are secured by a property asset, such as industrial or commercial real estate assets to allow for the capital improvement of that asset.
MaxCap currently provides capital to asset owners and developers for commercial real estate across the development cycle from vacant land to construction and development to established assets that require refurbishment or have redevelopment potential as well as stable assets.
The group recently commissioned research from the University of Technology Sydney (UTS) analysing 20 years of CRED data. This report outlines the opportunity why commercial real estate debt investments act as a critically important portfolio enhancer and diversifier.
Here’s three things you need to know about CRE Debt:
1. A big funding gap which represents a seminal and scalable opportunity for investors
The $60 billion funding gap is largely driven by APRA.
Over the past three years, APRA has pulled back on commercial real estate. This was seen as essential because the major banks have nearly 90% of all CRE loans. In 2018, the regulator imposed capital provision ratios to de-lever the banks' exposure resulting in a large funding gap. While the major banks are still the primary lenders, there are now a few institutional grade alternative lenders - including companies such as MaxCap. Wayne Lasky believes that the impact of these regulatory changes will only come into full effect in 2025, so there's a lot more runway in this market.
2. Savers are rewarded by allocating to CRE Debt
In a 'lower for longer' interest rate environment, many investors are being forced to move up the risk curve to find yield. So for investors who want reliable income, especially through a market crisis, CRED offers a compelling alternative.
According to the UTS-MaxCap report, "CRED returns tend to improve relative to other asset classes during periods of crisis and sustained economic uncertainty and therefore act as a stabilising force in an investment portfolio".
Adding a 10% allocation to CRED in a portfolio, according to the research, provided greater returns, less volatility and a growing Sharpe ratio.
3. Risk-adjusted returns
The MaxCap-UTS research demonstrates the portfolio benefits of a CRED allocation. The report showed a blended (senior and junior) CRED portfolio achieved 15.8% p.a. returns compared with 9.9% p.a. for an outright commercial real estate portfolio.
Australian commercial real estate debt is a big portfolio booster, particularly in the current economic climate. New regulatory change, with far-reaching impacts across the industry, means that Australia's lending market is very early in the cycle for exploring alternative lending.
And with ongoing quantitative easing and zero interest rate policies in place around the world, it's not just Aussies who have their eyes on the CRED market. Pre-COVID, MaxCap Group secured $600 million in funding from APG, one of the world's largest pension funds with approximately €500 billion in AUM. Offshore investors are hugely interested in this market, especially in Australia – a core market in the Asia Pacific region with a sound geopolitical climate, AAA rating, and strong underlying property market fundamentals.
Find your returns in commercial real estate debt.
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