This Australian investment space is surging – and global investors have taken note

Australia is attractive on a global basis. While you may think that this is referring to either our beautiful landscapes that draw in the tourists, or the high-calibre universities drawing demand from international students, in this case, I’m referring to our real estate market. If this comes as a surprise, then it is time to take a closer look.

“If you look at the Australian commercial real estate lending market, it is $437 billion and it has been growing strongly over the past decade. If you look at the compound rate of growth over that 10-year period, it’s running at about 6% per annum,” says Mark Power, Head of Income Credit for Qualitas.

One of the biggest drivers for this has been population growth – and a significant undersupply of property. Further to this is the funding gap created by tighter regulations on the big banks – the traditional financiers in this space, which has opened an enormous opportunity for alternative financiers, like Qualitas to enter.

While Australian real estate sounds appealing to local investors, Power points out that it is actually the sixth most traded real estate market globally and a popular diversifier away from US and European markets.

In this episode of The Pitch, Power explores the real estate private credit market in Australia and the drivers behind its ongoing growth causing its enormous global appeal.

This interview was filmed on 21 February 2024.

Edited transcript:

How large is the real estate private credit market?

Power: What we’re talking about in terms of private real estate credit is providing loans to property investors and developers in the commercial space. When we’re talking about the commercial space, it is across all sectors. It is loans for commercial offices, for retail, for high-density residential apartments, industrial and other specialised asset classes.

In terms of how large the market is, in one word – "enormous". If you look at the Australian commercial real estate lending market*, it’s $437 billion and it’s been growing strongly over the past decade. If you look at the compound rate of growth over that 10-year period, it’s running at about 6% per annum.

*Source: APRA's Monthly Authorised Deposit-taking Institution Statistics, September 2023

What are some of the key drivers in this space?

Power: There are a number of drivers. The physical real estate market is undergoing a material amount of growth underpinned by the whole population growth story here in Australia. That’s been well reported in the press in terms of the extent of that population growth. What that means is that it creates demand for real estate, so you need more dwellings for people to live in, you need more shopping centres, you need more industrial facilities.

Where there’s demand for underlying real estate, capital will generally follow that to assist with development of those projects. 

When we’re saying capital will follow it, the interesting piece playing out in the market at the moment is there’s some very significant structural change going on in real estate debt markets. That structural change is in terms of the banks, who once dominated the sector.

If we go back 10 years ago, their market share was circa 87% or thereabouts, a really dominant position. However, they have been ceding market share on a year-by-year basis. That market share is now down to around 72% and that hasn’t happened by accident. 

Post the GFC, the regulator wanted to de-risk the banks as much as possible to ensure the banking system could withstand further external shocks – GFC 2 or whatever might be around the corner. One of the levers they pulled on was to de-weight the bank’s exposure to commercial real estate and narrow the sandbox they can participate in. By virtue of doing that, it has created a very substantial capital gap in the marketplace and that capital gap is being filled by private credit. Institutions, particularly offshore institutional capital participants in other parts of the world, are finding Australia a really attractive destination to invest in.

What makes Australia so appealing to offshore investors?

Power: It’s a number of things.

If you think about Australia, it provides a really good entry point into the APAC region. Global investors have various choices – whether it’s the US, Europe or Asia – and Australia and the APAC region more generally don’t necessarily correlate closely to what’s happening in the US and Europe from an economic and geopolitical perspective. In that sense, it provides good diversification for those investors. Then, if they’re coming into APAC, you go where are you going to invest in the region? Australia is a really attractive destination. Our rule of law is quite lender or investor-friendly, in a security sense. The actual market itself has the second-highest GDP per capita in the APAC region. The physical real estate market here is the sixth most traded real estate market globally as well.

There are a number of factors that are appealing, but the absolute differentiator is the level of population growth running through this country. As I mentioned earlier, that population growth generates demand for underlying real estate, but also real estate credit. 

Just to unpack that a bit further, the population growth running through Australia is forecast to grow 13.4% between 2022-2031. If you compare that to other parts, even just the APAC region itself is forecast to grow at 5.4%, so a much greater rate of growth. 

If you compare that to other parts of Europe, which are essentially flatlining in terms of population, Australia has a clear differentiator as far as that’s concerned and that's not changing any time soon.

If you look at the amount of net overseas migration that has come into the country over the past year, we’re running at unprecedented levels of growth - 518,000 was the number in terms of positive net overseas migration to June 2023. To put that in perspective, in the 10 years prior to COVID, that was running at around 217,000 so it’s a very substantial uptick. It’s running at unprecedented levels. While there is talk of pulling that back, even the government forecast for the next financial year is still around 375,000. There’s really strong population growth driving demand for real estate.