David Ooi, Director – Capital & Business Advisory
In the landscape of investment strategies, private debt investing has emerged as a compelling option to investors, offering a unique proposition to diversify portfolios while generating stable and attractive risk-adjusted returns.
In simple terms, private debt involves investors directly providing loans to borrowers, cutting out conventional financial institutions. Historically the domain of sophisticated investors, family offices and institutions, the rise of non-bank, private lending intermediaries has made this asset class accessible to broader wholesale qualified investors and self-managed super funds (SMSFs) investors.
What is Commercial Real Estate Debt Investing?
Private debt lending in the property sector is often referred to as Commercial Real Estate Debt (“CRED”). Breaking down this terminology into two parts:
“Commercial” refers to the underlying purpose of the lending. One common misconception is that CRED loans are used to fund commercial properties (i.e. offices, industrial and not residential). This description is incorrect as the distinction comes down to the purpose of the loan rather than the security. So long as the loan is intended for non-personal use (i.e. commercial), then it is a CRED loan regardless of whether the security is residential, commercial or industrial.
“Real Estate Debt” refers to the secured loan against tangible real estate. The link to tangible real estate is one of the most compelling features of CRED since it allows investors to touch, feel or see the underlying property before committing.
What is so compelling about Commercial Real Estate Debt?
• An asset class often well understood by most investors owing to the tangible real estate that secures the loan.
• It has little correlation to traditional markets and, therefore, helps to diversify portfolios.
• Small minimum tickets as low as $10,000 aid accessibility and portfolio diversification compared to direct property investing.
• Low volatility asset shields investors from fluctuations inherent in traditional stock markets.
• Attractive risk-adjusted return compared to traditional fixed-income options such as cash accounts, term deposits and bonds.
• Can be a source of steady cash flow with structures featuring regular monthly interest payments
What are the risks to be aware of in Commercial Real Estate Debt?
Just like any other investment, a risk is involved in Commercial Real Estate Debt. It is necessary for investors to understand and identify these risks ahead of any decision to invest. Here, we break down the typical risks an investor should consider:
Manager Risk – The manager originates and manages the investment until funds are repaid to the investor. As the first line of defence, a good manager will have stringent credit underwriting standards, a track record of successful investments and a well-rounded team drawing on a range of experiences.
Credit Risk – refers to the risk attached to the underlying transaction. It is crucial to be aware of a transaction's potential challenges. Not all transactions are equal and will have specific risks unique to the style of transaction.
Sponsor Risk – refers to the owner or developer defaulting on their loan obligations. Key considerations are experience and track record delivering similar projects and the strength of their balance sheet, including assessing commitments to other projects.
Liquidity Risk – An investment in CRED often has a fixed term, and investors will not be able to liquidate their investment prior to maturity or the project is sold or refinanced.
As the appetite for alternative investment strategies grows, private debt is poised to play an increasingly prominent role in shaping investment portfolios, offering a middle ground that balances risk and reward effectively. Investors should, however, be aware that there are risks involved.
With a team of industry professionals and a solid track record in the wealth advisory and property sector, we curate attractive transactions for our investors to help them navigate this emerging asset class.
Speak with one of our team members today at clientservices@primefinancial.com.au to explore how Prime can assist you in achieving your investment objectives.
