Banking sector structures and regulatory intervention over the past 10 years have created a funding gap as the major banks have been unable to meet the needs of quality borrowers.

The major banks tend to have more rigid lending criteria due to:

1. Australian Prudential Regulation Authority (APRA) regulation that restricts their ability to provide flexibility on their loan terms, and therefore may not always be able to meet a borrower’s specific requirements.
2. Basel III regulatory framework reforms (which required banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand). This resulted in Australian major banks withdrawing further from commercial real estate (CRE) debt as they focused on other parts of their funding operations (e.g. residential mortgages). Whilst major banks are still funding CRE transactions, it has been far more suppressed and on more restrictive terms.

This tightening by major banks means quality bank clients are seeking alternative funding solutions as they require offer considerably faster turnaround times, more flexible lending criteria, and bespoke solutions.

At Zagga, we pride ourselves on our ability to provide tailored solutions to meet the unique needs of each borrower and deliver a commercial, flexible, and responsive outcome, whilst always maintaining our rigorous and thorough assessment of the loan.

The Australian commercial property market has proved to be remarkably resilient over many years as has the overall economy which has seen almost uninterrupted growth for three decades, with no recessions since 1991.

The robustness of the economy is key to understanding real estate demand. While headlines with week-to-week house price data may fuel concern, the fundamentals that underlie such prices are less dramatic. Australian house prices have risen significantly over the past 40 years, with periods of volatility balanced out by overall growth. The population has also doubled in the same timeframe, from approx. 12.5m to 25m.

In the period from the opening of Australia’s international borders following the COVID pandemic, the net immigration inflow will total more than 1 million people in less than 3 years. Over the same time, there will be a further 200,000 people or so from natural increase.

A growing population, combined with low rental vacancy rates, strong employment rates and a persistent underlying housing gap means the long-term fundamentals make this sector attractive to investors. Over the next 3 to 5 years, the need for housing will be very strong, simply to keep up with population growth. Approximately 200,000 new dwellings will need to be constructed each year to simply meet demand.

Regardless of short-term price movements, the market dynamics are strongly supportive of a robust property investment industry with decades of demand ahead of it.

We invite you to read our latest whitepaper “Remarkably Resilient: Australian Real Estate in an Age of Inflation” to find out more.

Market dynamics indicate that the Australian CRED market is on a growth trajectory. The Australian CRED market is estimated at $450bn and growing at c.2 – 5%p.a. underpinned by attractive fundamentals centred on urbanization and population expansion.

The two key driving forces behind Australian CRED growth are:

1. Further regulatory pressures on the major banks leading to structural dislocation in their lending capacity and practices. This is projected to reduce major banks’ share of CRED from the current ~80% to ~60% by 2025 due to their inability to provide best service to their clients.
2. Population growth underpinning continued demand for housing as well as industrial growth as new, larger facilities are being built to accommodate the growth of e-commerce.

Zagga’s latest white paper explains how commercial real estate debt (CRED) can tap into the current market conditions.

All individuals, Self Managed Super Funds (SMSFs), companies and trusts that meet the criteria of a Wholesale Investor (or ‘Sophisticated Investor’) as defined under the Corporations Act 2001 (Cth) can invest in Commercial Real Estate Debt through Zagga.

Our investors come to us as we offer fast, flexible, customised lending solutions and secured, determinable investment income.

Investors choose us for our values of:

• Transparency
• Lending and investment integrity
• Robust credit and risk discipline
• Strong governance
• Investor-first approach

Our interest rates are typically higher than those offered by major banks. This is due to Zagga’s higher cost of capital compared to a traditional bank.

Borrowers turn to, and at times, prefer non-bank lending for a number of key reasons:

• Speed
• Flexibility of lending and structure
• Lending capacity
• Certainty of funding

Borrowers are willing to pay the higher cost of funds for the short period of time as it often allows them time to meet the requirements for major bank funding.

Zagga has never lost money. The business has zero realized credit losses across over $1.3Bn of loan originations dating back to inception in 2017.

Zagga’s Management and Board has significant experience across the real estate sector in operational, lending and recovery roles, focused on achieving superior risk-adjusted returns for our investors.

Our proactive management of all borrower facilities means we are constantly stress testing all our loan exposures to changes in rental yields, capitalisation rates, general market conditions and the effects of these on all factors and valuations.

Like any type of investment, potential investors should always understand the risks involved and we encourage all our investors to conduct the due diligence necessary to make the best investment choices for their risk appetite and investment criteria.

Zagga provides loan funding to creditworthy businesses and individuals, who must demonstrate to us, as part of our credit assessment, their financial position and reputation, ability to service the relevant loan, and experience in their industry.

Zagga will fund both stabilised assets and development opportunities. Our lending transactions range from $10m to $75m and cover a spectrum of loan purposes including business, commercial, residential and property.

Each loan arranged by Zagga is secured by a first ranking real property mortgage (i.e. Senior Debt) and typically fall into four categories:

• Construction (residential, commercial, industrial)
• Bridging (e.g. site purchases, debt consolidation)
• Residual Stock (i.e. post construction facilities)
• Land Bank / Subdivision

The ability to generate attractive investor returns whilst maintaining the highest level of risk management in the CRED sector is the key reason we specialise in this niche sector.

It is important to note we are conservative in nature and typically avoid specialised assets that are difficult to sell in a secondary market along with loans that involve zoning risk (i.e., changing a residentially zoned site to industrial, which would require Government approval).

Similar to our Investor base, our roster of Borrowers has grown steadily through personal relationships and word of mouth, with our track record allowing this to continue to occur organically.

Over 40% of Zagga’s loans come from repeat borrowers.

Zagga may also originate loans from commercial brokers, accountants, lawyers, quantity surveyors, and consultants within the property industry.

Our loans are spread over the eastern seaboard of Australia, particularly in strong metropolitan locations with a deep market and high-growth areas that allow for a strong property market.

We currently have no exposure in Northern Territory, South Australia or Western Australia.

Our primary focus has been in New South Wales, as not only does it hold the deepest market in Australia, but it is central to where our current team is primarily located and possess the greatest market knowledge. We also ensure we are visiting sites regularly with consistent and thorough monitoring of projects, therefore, having a heavier concentration locally allows us to do this to the best of our abilities.

Each loan we fund is supported by a clear and achievable ‘exit strategy’, typically including at least one or two alternative exits.

Given the largest allocation of our portfolio relates to residential construction, a number of our facilities are self-liquidating, meaning at completion we are either cleared by sales on the project, or a refinance from a major banking institution.

In other circumstances, the loan may have a clear exit strategy in place, such as, a cash event from an external matter, or an uplift in planning due to development approval that takes out our facility.

We always want to ensure we are working on worst case scenarios in order to be comfortable going into any new transactions.

The major banks still serves as our biggest competitor, as they are continue to be the cheapest source of capital in the market, and in many cases, can still win over transactions on that basis alone. However, as major bank funding continues to tighten, the ability for non-bank lenders to win market share will increase given our ability to offer beneficial terms with faster turnaround times.