By Tom Cranfield, executive director, Zagga
As investors adapt to a changing market environment, resilience has become a central focus of portfolio construction. Ongoing geopolitical tensions, heightened volatility, rising rates and persistent inflationary pressures are driving greater attention toward assets capable of providing downside protection. Compounding the pressure is the rising correlation between traditional bonds and equities, with investors recognising that traditional portfolio construction may no longer be fit-for-purpose.
Amidst the hunt for resilience, private credit has earned a reputation as a stabilising force – providing genuine portfolio diversification, stable income, and attractive risk-adjusted returns. Yet, as the global private credit market makes headlines, many question whether the proposition remains compelling.
Australian real estate private credit has largely differentiated itself due to its backing by quality, underlying real assets, a well-regulated lending market, and the strong tailwinds powering our local property sector. However, private credit is not a homogenous asset class. As every facet of financial markets feel the pressure the focus must be on governance, prudent risk management, and specialised, cycle-tested investment expertise.
As we mark Zagga’s nine-year anniversary, we recognise that the investment landscape today seems almost unrecognisable to the one we were founded in. Market cycles are becoming shorter and more intense, with the ability to deliver across these cycles no longer just an advantage but a baseline for trust.
To help investors identify opportunity through uncertainty, Zagga celebrated its milestone anniversary with the launch of an educational whitepaper series spotlighting the challenges and opportunities in Australian real estate private credit. Our aim is to ensure investors remain informed and empowered to make prudent, timely decisions in an ever-evolving investment environment.
Here are three key insights from our launch whitepaper that we believe every investor should know.
1. Focus on correlation and diversification
For decades, diversification has been the golden rule of investing. Yet, as market dynamics change, diversification alone is no longer enough. To protect from downside-risk, we need to construct portfolios that are both diversified and uncorrelated.
This has become an increasingly difficult challenge. Instead of bonds providing their traditional diversification buffer, they are increasingly moving in tandem with equities. Since 2022, this correlation has been positive and rising. Higher for longer inflation, rising interest rates, and persistent market uncertainty is expected to see this positive correlation continue.
With the traditional 60/40 portfolio under strain, investors are turning to alternative asset classes, like private credit, which are unlisted and uncorrelated to the swings of public markets. In real estate private credit, loans are commonly structured with floating interest rates, meaning returns move in line with the prevailing cash rate, maintaining a consistent margin above the benchmark. This alignment provides a built-in hedge that is absent from traditional fixed income securities like government bonds, which typically lose value when interest rates increase. It also helps to smooth returns over time when compared with the volatility experienced across other asset classes.
2. Australia private credit primed for growth
Globally, private credit is a USD $1.96 trillion market, forecast to grow to almost USD $3.5 trillion by 20311. Asia Pacific is the fastest growing region, globally, for private credit, with the Australian market alone growing by 9% year-on-year, now valued at AUD $224 billion in assets under management (AUM)2. Commercial real estate lending accounts for ~18% of the local market, with AUD $92 billion invested3.
This is not an isolated, short-term trend. Private credit in Australia has been growing consistently for more than a decade, moving from a niche option to a significant, rising source of commercial financing. It has now outpaced traditional bank debt and bond markets, with a CAGR of 21% over the last decade,4 compared with ~5% for banks and bonds5.
Real estate private credit is set to be one of the biggest beneficiaries of this strong and sustained growth trajectory. Fuelled by 20 years of growth, the structural imbalances in Australian real estate present a compelling opportunity. Australia has one of the fastest growing populations in the western world, driven by strong immigration, and currently faces a shortage of ~262,000 dwellings6. The government has set a target of 1.2 million new homes by 2029, delivering industry reforms and favourable policy designed to drive housing supply.
As traditional lenders pull back from development financing, due to capital and regulatory constraints, private credit will play an increasingly prevalent and important role in meeting this national demand. Today, private credit accounts for just 18 percent of Australia’s commercial real estate debt market, compared to 37 percent in the UK and 55 percent in the US. Our market has significant room for growth, and global capital is recognising this burgeoning opportunity.
3. Time for experience and discipline
Yet, with persistent macro uncertainty, we must sharpen our focus on fundamentals. Investors must ask better questions – not just about returns, but about risk, structure, and governance. Because beneath private credit’s single label sits a wide spectrum of investment opportunities and varying degrees of risk.
An experienced manager, with a proven, cycle-tested track record, understands these distinctions. They are fluent in recovery processes, maintain strong counterparty relationships, and can act decisively to protect investor capital. This is where experience and discipline can translate directly into returns.
As investors fortify portfolios, we must remember that private credit investments do not all share the same attributes and cannot be uniformly assessed. Proactive due diligence to understand the underlying investment and associated risks will help investors seize the right opportunity and move portfolios from risk to resilience.
