For Zagga, the year has begun, much like it ended, with a spate of activity.
It was very pleasing, during the final quarter of 2023, to see several extended loans discharging, offering an opportunity for investors to re-cycle their money into fresher opportunities. We look forward to this trend continuing through 2024, as the industry implements solves for the various factors that caused these delays.
We are also detecting an easing of concern amongst our investors, who are coming to terms with both the higher interest rate and higher-inflation environment. We have a decent pipeline of strong opportunities which we look forward to making available in coming months.
I note that the RBA decided on 06 February 2024 to hold interest rates steady. In its remarks, the RBA noted that:
“While recent data indicate that inflation is easing, it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”
Without making any predictions whatsoever, the consensus view appears to be that interest rates will hold steady while inflation will slowly improve over 2024. We are basing our lending and investment strategies on that expectation.
This week, we read about the failure of another large builder, St Hilliers, which has now stopped operations across 21 sites and has gone into voluntary administration, having pumped more than $30m into its building subsidiary over the last year. Whilst this is disappointing news in a market which has heard too much disappointing news, it is important to bear in mind that this is less the result of an endemic industry issue, and more the case of a specific case in point. Paying attention to construction firms’ fundamentals, and their management of contracts and cashflow, can provide comfort about future viability.
In a market defined by strong demand fundamentals (driven by a housing shortage), quality developments and reputable builders will continue to succeed. This is what we seek to fund. We also strongly believe that the niche in which we operate, with loan sizes from $3m to $50m, presents a stronger risk management case than substantially larger loans. At Zagga, our borrower due diligence includes a deep dive into the operational and economic performance of the builder and its ability to deliver on time and within budget.
We know that there are strong headwinds ahead and that challenges aplenty remain.
However, we remain cautiously optimistic given that the CRED space is not only maturing and developing, but now forms an established and recognised element within the funding cycle. In this regard, research house, Foresight Analytics, predicts that by 2028, almost a quarter of the CRED sector could be supplied by non-bank lenders in Australia.
Its research valued the non-bank CRED sector at $74 billion at the end of 2023, giving it a 16% share of the $447 billion total CRED market – a significant rise from a market share of 10.4% in 2020. This equates to a compound annual growth rate of 35% over the period.
Our lending book, which grew close to 30% in the 2023 calendar year, continues to perform exceptionally well under these circumstances, which is a testament both to
- the quality of our credit team which manages these loans,
- as well as the underlying borrowers who have overcome very difficult conditions, much of which well beyond their making or control, in progressing their developments and servicing their commitments.
At Zagga, our key focus is to generate a stable, consistent, solid return on the cash portion of our investors’ investment portfolio.
Protection of your capital is our foremost consideration. These types of returns, delivered year on year, represent meaningful returns when looked back at over the medium- to long-term. Our track record to date speaks to our success in delivering these returns at very low risk. In acknowledgement of this, our investor base has grown by word of mouth from the original 16 who funded our first loan in June 2017 to several hundreds across both our direct investment and fund investment channels. My deep and sincere appreciation to our loyal investors for their continued support and trust.
As always, our team members are available to meet or discuss with you any queries, concerns or requests for information you might have.
Wishing us all a healthy, successful, happy and fulfilled 2024.
