Source: The Australian
Author: Amy Marnie
Date: November 2024
A once unloved investment class has turned into hot property among a broad range of investors.
Commercial Real Estate Debt (CRED) has undeniably hit the mainstream this year.
“Where once CRED was considered an alternative asset class, now everybody’s trying to get into it,” says Alan Greenstein, CEO and co-founder of real estate private credit manager Zagga. “Super funds are moving into CRED, and so is the man on the street. We’re seeing huge inflows.”
Traditionally, Australia’s Big Four banks, alongside smaller second-tier banks, have dominated around 85 per cent of the commercial real estate debt market, holding approximately $357.4 billion in loan exposures. But the winds of change are blowing – hard.
In response to increased regulatory requirements following the Banking Royal Commission and Basel III reforms, traditional banks are tightening their loan books to the commercial property sector due to the significantly increased capital constraint. This change has opened the door for non-bank lenders like Zagga to offer more flexible loan solutions in much more efficient decision-making timeframes, particularly for property developers or asset owners with complex or ‘out of the box’ borrowing needs.
CEO and co-founder of real estate private credit manager Zagga Alan Greenstein says non-bank lenders are breaking into the mainstream.
According to Mr Greenstein, many ‘bank-grade’ borrowers are now turning to non-bank lenders as their first option.
"Banks are like big beasts – it’s hard to turn a big ship quickly, so they take time. Non-bank lenders like Zagga offer the same funding ability without compromising credit quality. But our real edge is speed and agility – we can act fast and be far more commercial than the banks," he says. “We play an important role in the funding landscape, and it's exciting to see this industry really getting on its feet."
Since its inception seven years ago, Zagga has handled over $2 billion in loans and repaid more than $1.2 billion to its investors. Today, it provides funding for projects ranging from simple residential developments to multi-million-dollar commercial, small-industrial and residential projects.
Unlike real estate investment trusts (REITs), which invest directly in properties, a CRED fund focuses solely on financing properties or development projects. Investors provide funds to borrowers – typically property developers or owners – in exchange for regular interest payments and the eventual repayment of the principal amount.
Zagga focuses on commercial real estate debt secured by first mortgages, positioning itself at the conservative end of the market.
“We deliberately operate at the most conservative end of the market, where it’s deepest,” Mr Greenstein says. “While it may not offer the highest returns, it provides our investors with comfort and protection.”
Just as corporate bonds provide an alternative to buying shares in companies, CRED provides exposure to the property market without needing to own the assets. However, unlike bonds, which depend on the yield curve, CRED offers a contracted return from day one.
“I lend you the money, and charge you an interest rate, and then you pay it back. It’s certain, transparent, and annuitised,” Mr Greenstein says.
Mr Greenstein says CRED’s appeal to investors is also in its defensive nature, especially in volatile markets. While the underlying property’s value might fluctuate, it’s typically less volatile than the stock or bond markets. Each lending transaction also undergoes rigorous credit assessment and due diligence.
“It’s easy to give someone money; what’s hard is getting it back,” Mr Greenstein says. “Our fundamental question when making a loan is always, ‘If we give this borrower the money, can we get it back?’ If we can’t see a clear path to repayment, we don’t proceed.”
Today, Zagga provides funding for projects from simple residential developments to multi-million-dollar commercial, small-industrial and residential projects.
Steady income stream, combined with the real property security, is the primary draw for investors.
Mr Greenstein says this steady income stream, combined with the real property security, is the primary draw for investors. “It may not generate the highest returns, but it creates a level of comfort and protection for our investors,” he says.
Transparency is also a cornerstone of Zagga’s approach.
“We disclose the rate the borrower is paying, our fee, and any other costs involved,” Mr Greenstein says. “We believe in being completely transparent, ensuring our investors have all the information they need to make informed decisions.”
Still, any investment is not without risk – “It should not be the only thing in your portfolio, it should be part of a balanced portfolio.” With CRED’s rising popularity, the market has also seen the emergence of less credible players. “With this level of popularity, the asset class can also attract a lot of fly-by-nighters,” Mr Greenstein says.
As with any investment decision, assessing your risk appetite and undertaking due diligence is essential.
“It’s a good time to invest in the commercial real estate debt sector – there are ample credible and conservative opportunities for everyone,” he says. “But the key is to do your research and understand the investment manager, their reputation, track record and the underlying loan transactions. In other words, be careful what you’re buying.”
