Amongst today’s volatile investment landscape, geopolitical tensions, shifting monetary policies, and softening rate cycles continue to create challenges for investors. As public markets fluctuate, the need for portfolio resilience and alternative income sources has never been greater. Traditional diversification models relying on public equities and bonds are proving ineffective, with increasing correlations undermining their protective function. This has driven institutional and high-net-worth investors to seek diversification in uncorrelated asset classes, such as real estate private credit.
Diversification through Real Estate Private Credit in 2025
Traditionally, multi-asset portfolios have relied on the negative correlation between bonds and equities for diversification. Yet, increasingly, we are seeing a positive correlation in public markets. 2022 was an extreme example, where we saw significant correlated dips in both bonds and equities. With current heightened volatility in global markets, investors need true diversification and downside protection via uncorrelated asset classes, like real estate private credit.
This search for diversification has driven the rise of alternative asset classes, like private credit, with approximately $40 billion currently outstanding in Australia1. Investment opportunities in commercial real estate debt, specifically, offer unique diversification benefits providing exposure across three asset classes: fixed income, real estate financing, and alternatives. This diversified exposure means it has low to negative correlation with traditional assets and public markets.
The demand, and appeal, for commercial real estate debt, and private credit more broadly, is growing. In 2024, Australia’s private credit market saw year-on-year growth of more than six percent2. Institutional money is leading the way, with Australia’s largest super funds, like Australian Super and Aware Super, allocating billions to the sector. Cbus is on-record noting it wants to triple its exposure in the coming 18 months. Globally, advisers are also jumping on board, with 60 percent of advisers planning to allocate at least 10 percent of client portfolios to private markets in 20253. Private credit has established itself as a go-to asset class for investors seeking diversification and defence in times of uncertainty.
Investment opportunities in Commercial Real Estate Debt
Globally, the private credit sector is expected to nearly double to US $2.8 trillion by end-20284. Yet, Australia’s market opportunity remains largely untapped, especially in real estate financing. This is rapidly changing. Australian family offices are actively exploring opportunities, with investment exposure growing from under 10 percent in 2019 to almost 40 percent in 20245. The wealth of Australian HNWIs is also reaching record highs, with growth outpacing global peers. Research shows real estate private credit is a stand-out asset class for these individuals given the attractive risk-adjusted returns and capital preservation6 benefits. We are seeing these trends reflected in Zagga’s investor base. In the financial year to date, our funds under management (FUM) have grown by almost 30 percent. More than 40 percent of our investors are HNWIs, while almost 15 percent of investment comes from family offices.
Australia is uniquely placed to seize the private credit opportunity, particularly in commercial real estate debt. The property sector continues to benefit from long-term population growth, infrastructure investment, and a robust regulatory framework, making it a reliable asset class for investors seeking stable yields, reliable income, and capital preservation. At the same time, tightened lending conditions by banks due to rising costs, and a growing demand for alternative financing have created significant opportunities, providing institutional-grade investments with attractive yields and and the added security of real property-backed assets.
Investor benefits of Commercial Real Estate Debt in 2025
For income-seeking investors, commercial real estate debt delivers compelling, risk-adjusted, and stable returns, with distributions funded by interest payments from the underlying loan. In contrast to equity markets, where volatility can erode returns, secured commercial real estate debt structures provide capital preservation while offering consistent yields. For example, Zagga delivered average monthly returns of 9.80 percent p.a.7. This risk-adjusted income continues to perform during periods of market turbulence and economic uncertainty and, given its floating rate, can serve as a shelter from inflation making it an attractive choice in volatile times.
Our real estate private credit market is attracting the attention of investors from across the Asia-Pacific (APAC) region who are drawn to its stable returns and portfolio diversification benefits, within a well-regulated market. Coupled with a sophisticated legal and regulatory framework, robust governance, and a resilient economy, Australia stands out as an ideal destination for long-term capital deployment. This appeal has only grown amid ongoing global economic uncertainty and challenges in key international markets.
Today, 15 percent of Zagga’s FUM originates from APAC, with affluent markets like Singapore and Japan driving inflows.
To meet this growing appetite, we have strategically expanded our footprint, including the registration of our flagship unitised fund, the Zagga CRED Fund, as a Foreign Investment Trust in Japan in 2024, as well as the establishment of our new Singapore Variable Captial Company (VCC) structure. We are not alone; competition from Australian private credit funds is steadily rising in APAC. As global uncertainty persists, the opportunity to capture premium returns through Australian commercial real estate debt is only growing.
Amid increasing market and global volatility, many investors are turning to income-producing, debt investments as a defensive strategy to protect and strengthen portfolios. Diversification is the golden rule of portfolio construction and investors are increasingly recognising the need for alternative asset classes, like real estate private credit, to achieve this.
The demand for defensive, income-generating investments has never been greater. If you’re looking to enhance portfolio resilience and harness the potential of real estate private credit, connect with the Zagga team today.
1. RBA, October 2024 (https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html) | 2. Nuveen, December 2024 (https://www.afr.com/companies/financial-services/private-credit-continues-rapid-expansion-20241128-p5kuao) | 3. Hamilton Lane, January 2025 | 4. Future of Alternatives 2028, Preqin, 2023 | 5. Preqin & Australian Investment Council, 2024, Australian Private Capital Market Overview | 6. CapeGemini World Wealth Report 2024 | 7. As at December 2024.
