Rising costs and demand fuel growth in private credit for construction funding

Investor Daily

Investor Daily

Investor Daily

April 8, 2024

April 8, 2024

April 8, 2024

Rising costs and demand fuel growth in private credit for construction funding

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With construction costs and immigration numbers on an upward trajectory, two fund managers have outlined how private credit, especially in construction funding for residential projects, is increasing in appeal.

The increasing emphasis on addressing Australia’s surging housing demand may present lucrative opportunities for private credit firms to engage while yielding robust returns for investors.

According to the Australian Bureau of Statistics (ABS), new dwelling prices rose 4.9 per cent in the 12 months to February, propped up by “builders continuing to pass on higher costs for labour and materials.”

Last month, the agency also reported Australia's population grew to 26.8 million people, driven by a net overseas migration of 548,800 individuals in the year ending 30 September 2023.

Rising costs and demand have together created the ideal conditions for private creditors.

Elaborating on this perfect storm of opportunity on an InvestorDaily webcast, Metrics Credit Partners’ managing partner, Andrew Lockhart, explained how demographic trends are contributing to the attractiveness of real estate-related lending.

“The greatest opportunity for us is obviously in real estate related lending, and for us that's primarily focused on development funding, large scale high-density apartments and land subdivision projects in residential markets,” Lockhart said.

“If you think about it, we're in a situation where we've got very strong immigration, very strong low levels of unemployment. Demand for residential property is very strong, and it's quite difficult for developers to bring some of those projects through the planning system to meet the demand.

“And so, we've seen over the last number of years, significant increase in costs associated with construction costs being offset by materially higher sales prices that have been achieved. And we're very active across Australia providing financing to those projects and that is meeting part of the demand for residential property.”

Other areas of interest for the firm include industrial property developments and financing of hotels, and notably, the firm currently has no exposure to some of the more specialised areas like commercial offices or student accommodation, Lockhart elaborated.

Meanwhile, construction funding remains a growing opportunity for AltX Group, which prefers to focus on the “smaller end of the spectrum” with transaction sizes of $5 million to $40 million.

“Our view is that there's less operational risk if you're funding the construction of a small apartment block or 12- 15 townhouses, compared to funding a 40-story high rise on the Gold Coast,” chief executive Nick Raphaely told InvestorDaily.

“What I mean by that is if anything goes wrong with the project, it's of a size and a scale that we can send our team in to look at it, to review it, and if necessary, to kind of manage the rectification and get the capital back for investors.”

This translated to a “very hands-on approach”, Raphaely said, adding that AltX also has a qualified civil engineer with a builder’s licence as part of its team in construction for its active lending way of business.

Raphaely also believes that the appeal for private credit lenders in construction funding arises from the existence of entry barriers.

“A lot of people will hold themselves out to be private credit providers and offer investors yield and product and so forth, but funding construction is much more complicated. You need to have expertise,” he said.

“And so, what that means is the number of competitors in the space is fewer, the margins that you can charge borrowers is higher, and so the return you can provide to investors is higher.”

The path ahead for private credit

Looking ahead, Raphaely expects the private credit market to continue to grow, and increase its relevance, even in a macroeconomic environment bracing for rate cuts.

“People have asked me over the years, you know, will your business be as relevant in a high-rate environment as it has been in a lower-rate environment? And I think our answer to that is, as long as there are transactions that are credit-worthy and that traditional mainstream banks are either unwilling or unable to fund, there will be a place for private credit to fund those transactions. And that would apply in any market environment and in any economic environment, so I think from a purely structural point of view, we don't see the offering becoming irrelevant in any way,” Raphaely said.

He remarked that, just as the taxi industry evolved with the advent of businesses like Uber, private credit could too.

“We think about the mainstream banks as the taxis. They operate in a certain way, they've been around for a long time, people are used to them. And private capital is almost the way Uber operates. There are different pockets of private capital with different risk appetites, with different credit lenses. It'll fund different types of transactions.

“What it does is it gives borrowers so much more choice. If you're a business that doesn't have asset backing but has strong cash flow, there's a private capital opportunity for you. If you're someone looking for a bridge loan and you've got strong assets as security, there's a private capital solution. If it's an infrastructure play or construction, there's a private capital solution. So, we're really in an environment now where it's much more about not just the banks, it's really about how is capital moving on the supply side to meet demands on the demand side.”

He also believes that evolving technology and more sophisticated tools will go on to assist private credit lenders to analyse and fund transactions with more pace and ease.

“Borrowers will get better outcomes, businesses will grow, and funding will become more available. I think the trend is there, certainly for the long term,” Raphaely affirmed.

The increasing emphasis on addressing Australia’s surging housing demand may present lucrative opportunities for private credit firms to engage while yielding robust returns for investors.

According to the Australian Bureau of Statistics (ABS), new dwelling prices rose 4.9 per cent in the 12 months to February, propped up by “builders continuing to pass on higher costs for labour and materials.”

Last month, the agency also reported Australia's population grew to 26.8 million people, driven by a net overseas migration of 548,800 individuals in the year ending 30 September 2023.

Rising costs and demand have together created the ideal conditions for private creditors.

Elaborating on this perfect storm of opportunity on an InvestorDaily webcast, Metrics Credit Partners’ managing partner, Andrew Lockhart, explained how demographic trends are contributing to the attractiveness of real estate-related lending.

“The greatest opportunity for us is obviously in real estate related lending, and for us that's primarily focused on development funding, large scale high-density apartments and land subdivision projects in residential markets,” Lockhart said.

“If you think about it, we're in a situation where we've got very strong immigration, very strong low levels of unemployment. Demand for residential property is very strong, and it's quite difficult for developers to bring some of those projects through the planning system to meet the demand.

“And so, we've seen over the last number of years, significant increase in costs associated with construction costs being offset by materially higher sales prices that have been achieved. And we're very active across Australia providing financing to those projects and that is meeting part of the demand for residential property.”

Other areas of interest for the firm include industrial property developments and financing of hotels, and notably, the firm currently has no exposure to some of the more specialised areas like commercial offices or student accommodation, Lockhart elaborated.

Meanwhile, construction funding remains a growing opportunity for AltX Group, which prefers to focus on the “smaller end of the spectrum” with transaction sizes of $5 million to $40 million.

“Our view is that there's less operational risk if you're funding the construction of a small apartment block or 12- 15 townhouses, compared to funding a 40-story high rise on the Gold Coast,” chief executive Nick Raphaely told InvestorDaily.

“What I mean by that is if anything goes wrong with the project, it's of a size and a scale that we can send our team in to look at it, to review it, and if necessary, to kind of manage the rectification and get the capital back for investors.”

This translated to a “very hands-on approach”, Raphaely said, adding that AltX also has a qualified civil engineer with a builder’s licence as part of its team in construction for its active lending way of business.

Raphaely also believes that the appeal for private credit lenders in construction funding arises from the existence of entry barriers.

“A lot of people will hold themselves out to be private credit providers and offer investors yield and product and so forth, but funding construction is much more complicated. You need to have expertise,” he said.

“And so, what that means is the number of competitors in the space is fewer, the margins that you can charge borrowers is higher, and so the return you can provide to investors is higher.”

The path ahead for private credit

Looking ahead, Raphaely expects the private credit market to continue to grow, and increase its relevance, even in a macroeconomic environment bracing for rate cuts.

“People have asked me over the years, you know, will your business be as relevant in a high-rate environment as it has been in a lower-rate environment? And I think our answer to that is, as long as there are transactions that are credit-worthy and that traditional mainstream banks are either unwilling or unable to fund, there will be a place for private credit to fund those transactions. And that would apply in any market environment and in any economic environment, so I think from a purely structural point of view, we don't see the offering becoming irrelevant in any way,” Raphaely said.

He remarked that, just as the taxi industry evolved with the advent of businesses like Uber, private credit could too.

“We think about the mainstream banks as the taxis. They operate in a certain way, they've been around for a long time, people are used to them. And private capital is almost the way Uber operates. There are different pockets of private capital with different risk appetites, with different credit lenses. It'll fund different types of transactions.

“What it does is it gives borrowers so much more choice. If you're a business that doesn't have asset backing but has strong cash flow, there's a private capital opportunity for you. If you're someone looking for a bridge loan and you've got strong assets as security, there's a private capital solution. If it's an infrastructure play or construction, there's a private capital solution. So, we're really in an environment now where it's much more about not just the banks, it's really about how is capital moving on the supply side to meet demands on the demand side.”

He also believes that evolving technology and more sophisticated tools will go on to assist private credit lenders to analyse and fund transactions with more pace and ease.

“Borrowers will get better outcomes, businesses will grow, and funding will become more available. I think the trend is there, certainly for the long term,” Raphaely affirmed.

The increasing emphasis on addressing Australia’s surging housing demand may present lucrative opportunities for private credit firms to engage while yielding robust returns for investors.

According to the Australian Bureau of Statistics (ABS), new dwelling prices rose 4.9 per cent in the 12 months to February, propped up by “builders continuing to pass on higher costs for labour and materials.”

Last month, the agency also reported Australia's population grew to 26.8 million people, driven by a net overseas migration of 548,800 individuals in the year ending 30 September 2023.

Rising costs and demand have together created the ideal conditions for private creditors.

Elaborating on this perfect storm of opportunity on an InvestorDaily webcast, Metrics Credit Partners’ managing partner, Andrew Lockhart, explained how demographic trends are contributing to the attractiveness of real estate-related lending.

“The greatest opportunity for us is obviously in real estate related lending, and for us that's primarily focused on development funding, large scale high-density apartments and land subdivision projects in residential markets,” Lockhart said.

“If you think about it, we're in a situation where we've got very strong immigration, very strong low levels of unemployment. Demand for residential property is very strong, and it's quite difficult for developers to bring some of those projects through the planning system to meet the demand.

“And so, we've seen over the last number of years, significant increase in costs associated with construction costs being offset by materially higher sales prices that have been achieved. And we're very active across Australia providing financing to those projects and that is meeting part of the demand for residential property.”

Other areas of interest for the firm include industrial property developments and financing of hotels, and notably, the firm currently has no exposure to some of the more specialised areas like commercial offices or student accommodation, Lockhart elaborated.

Meanwhile, construction funding remains a growing opportunity for AltX Group, which prefers to focus on the “smaller end of the spectrum” with transaction sizes of $5 million to $40 million.

“Our view is that there's less operational risk if you're funding the construction of a small apartment block or 12- 15 townhouses, compared to funding a 40-story high rise on the Gold Coast,” chief executive Nick Raphaely told InvestorDaily.

“What I mean by that is if anything goes wrong with the project, it's of a size and a scale that we can send our team in to look at it, to review it, and if necessary, to kind of manage the rectification and get the capital back for investors.”

This translated to a “very hands-on approach”, Raphaely said, adding that AltX also has a qualified civil engineer with a builder’s licence as part of its team in construction for its active lending way of business.

Raphaely also believes that the appeal for private credit lenders in construction funding arises from the existence of entry barriers.

“A lot of people will hold themselves out to be private credit providers and offer investors yield and product and so forth, but funding construction is much more complicated. You need to have expertise,” he said.

“And so, what that means is the number of competitors in the space is fewer, the margins that you can charge borrowers is higher, and so the return you can provide to investors is higher.”

The path ahead for private credit

Looking ahead, Raphaely expects the private credit market to continue to grow, and increase its relevance, even in a macroeconomic environment bracing for rate cuts.

“People have asked me over the years, you know, will your business be as relevant in a high-rate environment as it has been in a lower-rate environment? And I think our answer to that is, as long as there are transactions that are credit-worthy and that traditional mainstream banks are either unwilling or unable to fund, there will be a place for private credit to fund those transactions. And that would apply in any market environment and in any economic environment, so I think from a purely structural point of view, we don't see the offering becoming irrelevant in any way,” Raphaely said.

He remarked that, just as the taxi industry evolved with the advent of businesses like Uber, private credit could too.

“We think about the mainstream banks as the taxis. They operate in a certain way, they've been around for a long time, people are used to them. And private capital is almost the way Uber operates. There are different pockets of private capital with different risk appetites, with different credit lenses. It'll fund different types of transactions.

“What it does is it gives borrowers so much more choice. If you're a business that doesn't have asset backing but has strong cash flow, there's a private capital opportunity for you. If you're someone looking for a bridge loan and you've got strong assets as security, there's a private capital solution. If it's an infrastructure play or construction, there's a private capital solution. So, we're really in an environment now where it's much more about not just the banks, it's really about how is capital moving on the supply side to meet demands on the demand side.”

He also believes that evolving technology and more sophisticated tools will go on to assist private credit lenders to analyse and fund transactions with more pace and ease.

“Borrowers will get better outcomes, businesses will grow, and funding will become more available. I think the trend is there, certainly for the long term,” Raphaely affirmed.

The increasing emphasis on addressing Australia’s surging housing demand may present lucrative opportunities for private credit firms to engage while yielding robust returns for investors.

According to the Australian Bureau of Statistics (ABS), new dwelling prices rose 4.9 per cent in the 12 months to February, propped up by “builders continuing to pass on higher costs for labour and materials.”

Last month, the agency also reported Australia's population grew to 26.8 million people, driven by a net overseas migration of 548,800 individuals in the year ending 30 September 2023.

Rising costs and demand have together created the ideal conditions for private creditors.

Elaborating on this perfect storm of opportunity on an InvestorDaily webcast, Metrics Credit Partners’ managing partner, Andrew Lockhart, explained how demographic trends are contributing to the attractiveness of real estate-related lending.

“The greatest opportunity for us is obviously in real estate related lending, and for us that's primarily focused on development funding, large scale high-density apartments and land subdivision projects in residential markets,” Lockhart said.

“If you think about it, we're in a situation where we've got very strong immigration, very strong low levels of unemployment. Demand for residential property is very strong, and it's quite difficult for developers to bring some of those projects through the planning system to meet the demand.

“And so, we've seen over the last number of years, significant increase in costs associated with construction costs being offset by materially higher sales prices that have been achieved. And we're very active across Australia providing financing to those projects and that is meeting part of the demand for residential property.”

Other areas of interest for the firm include industrial property developments and financing of hotels, and notably, the firm currently has no exposure to some of the more specialised areas like commercial offices or student accommodation, Lockhart elaborated.

Meanwhile, construction funding remains a growing opportunity for AltX Group, which prefers to focus on the “smaller end of the spectrum” with transaction sizes of $5 million to $40 million.

“Our view is that there's less operational risk if you're funding the construction of a small apartment block or 12- 15 townhouses, compared to funding a 40-story high rise on the Gold Coast,” chief executive Nick Raphaely told InvestorDaily.

“What I mean by that is if anything goes wrong with the project, it's of a size and a scale that we can send our team in to look at it, to review it, and if necessary, to kind of manage the rectification and get the capital back for investors.”

This translated to a “very hands-on approach”, Raphaely said, adding that AltX also has a qualified civil engineer with a builder’s licence as part of its team in construction for its active lending way of business.

Raphaely also believes that the appeal for private credit lenders in construction funding arises from the existence of entry barriers.

“A lot of people will hold themselves out to be private credit providers and offer investors yield and product and so forth, but funding construction is much more complicated. You need to have expertise,” he said.

“And so, what that means is the number of competitors in the space is fewer, the margins that you can charge borrowers is higher, and so the return you can provide to investors is higher.”

The path ahead for private credit

Looking ahead, Raphaely expects the private credit market to continue to grow, and increase its relevance, even in a macroeconomic environment bracing for rate cuts.

“People have asked me over the years, you know, will your business be as relevant in a high-rate environment as it has been in a lower-rate environment? And I think our answer to that is, as long as there are transactions that are credit-worthy and that traditional mainstream banks are either unwilling or unable to fund, there will be a place for private credit to fund those transactions. And that would apply in any market environment and in any economic environment, so I think from a purely structural point of view, we don't see the offering becoming irrelevant in any way,” Raphaely said.

He remarked that, just as the taxi industry evolved with the advent of businesses like Uber, private credit could too.

“We think about the mainstream banks as the taxis. They operate in a certain way, they've been around for a long time, people are used to them. And private capital is almost the way Uber operates. There are different pockets of private capital with different risk appetites, with different credit lenses. It'll fund different types of transactions.

“What it does is it gives borrowers so much more choice. If you're a business that doesn't have asset backing but has strong cash flow, there's a private capital opportunity for you. If you're someone looking for a bridge loan and you've got strong assets as security, there's a private capital solution. If it's an infrastructure play or construction, there's a private capital solution. So, we're really in an environment now where it's much more about not just the banks, it's really about how is capital moving on the supply side to meet demands on the demand side.”

He also believes that evolving technology and more sophisticated tools will go on to assist private credit lenders to analyse and fund transactions with more pace and ease.

“Borrowers will get better outcomes, businesses will grow, and funding will become more available. I think the trend is there, certainly for the long term,” Raphaely affirmed.

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AltX is an online investment platform offering alternative income – generating investments, delivered seamlessly.

Disclaimers

AltX Pty Ltd (ACN: 618 796 115, AR no: 1270087), is an authorised representative of AltX Funds Management Pty Ltd (ACN: 113 502 604, AFSL no: 291314). The information on this website has been prepared for accredited wholesale clients – only who are interested in learning about the different products they can access via AltX. This information is factual information only. Any displays of potential investments are for example purposes only, and may not actually be available to investors. It does not take into account any of your personal objectives, circumstances or needs and does not constitute financial advice. Choosing an investment is an important decision and, before making any investment decision, you should consider obtaining financial advice, always read the disclosure documents as listed against every deal on the AltX investment platform and understand the associated risks as explained as on the AltX investment platform. 

Past performance is not an indicator of future performance. Expected or forecasted returns may not reflect actual performance. Any displays of potential investment opportunities are for sample purposes only, and may not actually be available to investors.

The information on this website does not constitute an offer to sell securities or a solicitation of an offer to buy securities. Further, none of the information contained on this website is a recommendation to invest in any securities.

AltX Pty Ltd is not a bank and is not regulated by the Australian Prudential Regulation Authority, and investing in AltX products is not the same as depositing money in a term deposit offered by a bank.

© 2024

AltX Funds Management Pty Ltd

AltX is an online investment platform offering alternative income – generating investments, delivered seamlessly.

Disclaimers

AltX Pty Ltd (ACN: 618 796 115, AR no: 1270087), is an authorised representative of AltX Funds Management Pty Ltd (ACN: 113 502 604, AFSL no: 291314). The information on this website has been prepared for accredited wholesale clients – only who are interested in learning about the different products they can access via AltX. This information is factual information only. Any displays of potential investments are for example purposes only, and may not actually be available to investors. It does not take into account any of your personal objectives, circumstances or needs and does not constitute financial advice. Choosing an investment is an important decision and, before making any investment decision, you should consider obtaining financial advice, always read the disclosure documents as listed against every deal on the AltX investment platform and understand the associated risks as explained as on the AltX investment platform. 

Past performance is not an indicator of future performance. Expected or forecasted returns may not reflect actual performance. Any displays of potential investment opportunities are for sample purposes only, and may not actually be available to investors.

The information on this website does not constitute an offer to sell securities or a solicitation of an offer to buy securities. Further, none of the information contained on this website is a recommendation to invest in any securities.

AltX Pty Ltd is not a bank and is not regulated by the Australian Prudential Regulation Authority, and investing in AltX products is not the same as depositing money in a term deposit offered by a bank.

© 2024

AltX Funds Management Pty Ltd

AltX is an online investment platform offering alternative income – generating investments, delivered seamlessly.

Disclaimers

AltX Pty Ltd (ACN: 618 796 115, AR no: 1270087), is an authorised representative of AltX Funds Management Pty Ltd (ACN: 113 502 604, AFSL no: 291314). The information on this website has been prepared for accredited wholesale clients – only who are interested in learning about the different products they can access via AltX. This information is factual information only. Any displays of potential investments are for example purposes only, and may not actually be available to investors. It does not take into account any of your personal objectives, circumstances or needs and does not constitute financial advice. Choosing an investment is an important decision and, before making any investment decision, you should consider obtaining financial advice, always read the disclosure documents as listed against every deal on the AltX investment platform and understand the associated risks as explained as on the AltX investment platform. 

Past performance is not an indicator of future performance. Expected or forecasted returns may not reflect actual performance. Any displays of potential investment opportunities are for sample purposes only, and may not actually be available to investors.

The information on this website does not constitute an offer to sell securities or a solicitation of an offer to buy securities. Further, none of the information contained on this website is a recommendation to invest in any securities.

AltX Pty Ltd is not a bank and is not regulated by the Australian Prudential Regulation Authority, and investing in AltX products is not the same as depositing money in a term deposit offered by a bank.

© 2024

AltX Funds Management Pty Ltd

AltX is an online investment platform offering alternative income – generating investments, delivered seamlessly.

Disclaimers

AltX Pty Ltd (ACN: 618 796 115, AR no: 1270087), is an authorised representative of AltX Funds Management Pty Ltd (ACN: 113 502 604, AFSL no: 291314). The information on this website has been prepared for accredited wholesale clients – only who are interested in learning about the different products they can access via AltX. This information is factual information only. Any displays of potential investments are for example purposes only, and may not actually be available to investors. It does not take into account any of your personal objectives, circumstances or needs and does not constitute financial advice. Choosing an investment is an important decision and, before making any investment decision, you should consider obtaining financial advice, always read the disclosure documents as listed against every deal on the AltX investment platform and understand the associated risks as explained as on the AltX investment platform. 

Past performance is not an indicator of future performance. Expected or forecasted returns may not reflect actual performance. Any displays of potential investment opportunities are for sample purposes only, and may not actually be available to investors.

The information on this website does not constitute an offer to sell securities or a solicitation of an offer to buy securities. Further, none of the information contained on this website is a recommendation to invest in any securities.

AltX Pty Ltd is not a bank and is not regulated by the Australian Prudential Regulation Authority, and investing in AltX products is not the same as depositing money in a term deposit offered by a bank.

© 2024

AltX Funds Management Pty Ltd