Investments, Private Assets, Property

Private credit may offer better returns than cash

Private credit SMSF Cash CrowdProperty Tony Zulli

Private credit investments into property development may offer SMSFs looking for better returns than cash a new alternative asset class.

Private credit investments can provide SMSF investors with better returns than cash investments, albeit with a different risk profile, but have yet to be adopted by many of them despite the burgeoning size of the market, according to a specialist property lender.

CrowdProperty Australia chief operating officer Tony Zulli said the private credit and debt market was broad and covered a range of underlying assets, but property lending and development was a rapidly growing area after many large banks pulled back from offering capital to developers.

“We believe the major banks will not come back in and lend to this sector and therefore this space has now been taken up by a lot of non-bank lenders and private lenders,” Zulli told smstrusteenews.

“Yet the upside potential, based on current estimates, is that the market is about $1 trillion across the various sectors within the private credit and debt market, but that potentially could be three times larger.”

He said this growth has opened the door for new retail and wholesale investors to access an investment that was previously inaccessible to them.

“Private credit is a loan and investors are investing their funds to provide a loan to a commercial enterprise and in our case it’s to a property development firm,” he said.

“There is a term to that loan, so there is a non-redemption period, but they do have the benefit of receiving an income at the end of that loan term or through regular distributions.

“There is a consideration in terms of liquidity, but SMSFs typically have long-term holdings and their investment objectives are also for a long-term retirement benefit.”

He said the underlying asset class was also familiar to SMSF investors and provided an alternative investment to generate income.

“Australian investors are well accustomed to investing in direct property themselves and have got an appreciation for it and this new asset class gives them another opportunity to still invest in property but through a loan structure,” he added.

“Yet the two biggest issues they face is inflation and the need for income and to protect existing assets and income.

“This accords with where private credit and private debt can help investors, including SMSFs, to be able to provide income, particularly if they are transitioning to pension phase or in pension phase, and protect against inflation because interest income paid out of these debt funds is above inflation and above the RBA cash rate.

“If you are investing in a cash management account, you are not going to get that and you would not get any protection from inflation either, even though inflation is coming down.

“The income streams that are provided out of private debt funds are a viable alternative and correlate well with holdings of direct equities and that helps to not only diversify, but also manage risk.”


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