Real Estate Credit: Australia's Largest Private Debt Segment
Commercial real estate debt is the engine room of Australian private credit. Here is how the common structures work and what separates prudent lending from stretch.
Why real estate dominates
Much of Australia's A$234.5b private credit market is secured against commercial real estate: residential development sites, industrial assets, offices, retail and land banks. The retreat of the major banks from segments of development finance — driven by prudential settings and risk appetite — created a funding gap that non-bank lenders and credit funds moved into.
The common facility types
Construction finance funds a project from slab to sell-down, typically with progressive drawdowns against certified work, quantity surveyor oversight and presale hurdles. Investment (or residual stock) loans refinance completed but unsold stock. Land bank facilities lend against undeveloped sites ahead of approvals. Mezzanine facilities sit behind a first-ranking lender to stretch total leverage, at materially higher pricing to compensate for the thinner equity cushion.
Each structure allocates risk differently. The further a lender sits from first-ranking security, the more the return depends on the sponsor's execution and the final sale market.
What underwriters actually assess
Beyond the loan-to-value ratio, experienced credit teams focus on the sponsor's delivery record, the realism of the feasibility (construction costs, programme, sales rates and prices), the contingency in the budget, the quality of presales, and the exit — whether the loan is repaid from sales, refinance, or asset sale. The exit matters most: private credit loans are short-dated, and every loan is, in effect, a bet on a specific repayment event.
Signals investors watch in this segment
For investors in real estate credit funds, the instructive questions are about concentration (single project, sponsor or geography), arrears recognition — how quickly does the fund acknowledge a troubled loan — and valuation practice, which ASIC's REP 814 brought into focus. A fund showing smooth returns with zero arrears through a construction downturn is a fund whose valuation policy deserves questions, not congratulations.
General Advice Warning: This explainer is factual and general in nature only. It does not constitute financial, investment, or legal advice, and has been prepared without taking into account the objectives, financial situation, or needs of any person. Obtain independent professional advice before making any financial decision.
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