How sophisticated investors are accessing the private credit boom
In a market ruled by volatility and macro uncertainty, investors are increasingly turning to alternative assets such as real estate private credit.
Stockhead
Don't miss out on the headlines from Stockhead. Followed categories will be added to My News.
Special Report: In a market defined by volatility, macro uncertainty, and evolving regulation, investors are increasingly turning to alternative assets for income, diversification, and capital preservation. One asset class standing out is real estate private credit.
Words by Alan Greenstein, CEO and co-founder of specialist real estate private credit investment manager Zagga
Australian real estate private credit is benefiting from a convergence of structural and regulatory forces. Major banks, constrained by tighter capital requirements and prudential oversight, continue to pull back from lending to property developers and construction projects.
Simultaneously, Australia’s chronic housing shortage, forecast to hit a shortfall of over 100,000 dwellings by 2027*, is driving demand for capital to fund new developments.
Private lenders are filling this gap and the opportunity is expanding rapidly. Commercial real estate (CRE) debt in Australia has grown to $85 billion in assets under management**, now representing approximately 17 percent of the Australian CRE debt market.***
For investors, this creates access to bank-grade borrowers and projects secured by quality assets. The result is an income-generating asset class that offers attractive risk-adjusted returns, typically uncorrelated with public markets.
While the benefits of CRE debt are increasingly recognised, one fundamental question persists: how should investors access real estate private credit -directly or via a fund?
Let’s explore both.
Direct investing: control and transparency
Direct investing typically involves participating in funding individual loan transactions via a private credit platform. This approach generally offers investors full visibility into the loan structure, underlying asset, borrower profile, and security position.
Key benefits:
Tailored exposure: Investors can select loans aligned with their preferred risk/return profile – considering term, investor return, risk, location, and loan purpose.
Transparency: Each transaction is fully disclosed, enabling targeted due diligence.
Potential for higher returns: Direct investments can offer higher returns as the investor can opt for opportunities higher up the capital stack, such as mezzanine, junior debt, or even preferred equity positions.
However, direct investing also demands active involvement. Investors must evaluate each transaction, understand legal structures, and accept the concentration risk inherent in investing across a small number of transactions.
Liquidity is also a key consideration, as investors are required to commit to the full loan term. At Zagga, this is typically 18 – 24 months.
Direct investing is best suited to those who want a hands-on role and have the time and expertise – or trusted advisors – to evaluate opportunities thoroughly and manage exposure actively.
Investing via a Fund: diversification and simplicity
While direct investment has traditionally been the dominant model in Australia’s real estate private credit market, professionally managed funds are gaining momentum. This is driven by growing investor appetite for diversification and a desire for professionally managed exposure to this asset class.
Real estate private credit funds pool capital from multiple investors and allocate it across a portfolio of loans selected by the investment manager in accordance with the fund’s mandate. This structure delivers regular income based on a target return, along with broader exposure and diversification, helping reduce the risks associated with individual loan performance.
By spreading capital across multiple loans – diversified by borrower, location, loan type, and maturity –funds can mitigate concentration risk. Underperformance in one loan is offset by the strength of the broader portfolio, enhancing resilience and return stability.
Key advantages:
Professional management: Investors benefit from the expertise of a dedicated fund manager responsible for portfolio construction, capital allocation, and risk management in line with the fund’s mandate. It is important for investors to do their due diligence and select an experienced, specialist manager with a proven track-record across multiple investment cycles.
Broader access: Lower minimums are opening access to investment -grade credit once reserved for institutional investors.
Diversification: Investors who choose to invest in a professionally managed real estate private credit fund, such as one of Zagga’s pooled or unitised private credit funds, can leverage the diversification from the carefully curated mix of loan types, purpose, locations, and sectors. This diversification helps mitigate the impact of any single property’s performance on the overall investment.
Funds also offer clearly defined liquidity terms. Some are open-ended with monthly or quarterly liquidity, others are closed-ended with limited opening periods, or have longer-term lockup periods.
Returns are typically linked to a floating rate benchmark, making returns attractive even as rates move. For example, Zagga’s flagship Feeder Fund targets a return of 500 basis points above the RBA cash rate and in FY25 delivered an average annualised return of 9.68%.****
The trade-off? Less control over individual asset selection and greater reliance on the fund manager’s capability, making due diligence on the manager’s risk discipline and performance history essential.
The team at Zagga brings deep domain expertise in Australia’s CRE debt market, with a strong focus on mid-market loans along the Eastern Seaboard.
Our deep understanding of the Australian property market, coupled with our extensive credit expertise, including due diligence, ongoing loan management and debt recovery, enhances the potential for favourable, risk-mitigated investor returns.
Which path is right for you?
Private real estate credit is no longer an emerging asset class – it is a vital component of diversified portfolios, offering risk-adjusted returns, inflation resilience, and real asset backing.
The decision to invest directly or via a fund is less about the asset class and more about your investment goals, risk tolerance, and preference for control versus convenience.
Both routes can be rewarding. What matters most is manager selection and doing your research to understand the structure, liquidity terms, and underlying credit processes.
Now is the time to be diversified and defensive; in today’s uncertain investment environment, Australian real estate private credit is being duly recognised as an asset class of choice.
* NHFIC State of the Nation’s Housing 2022-23
** Australian Private Debt Market Review 2024
*** Alvarez & Marsal Research Report, 2024
**** Return net of fees with distributions reinvested
The views, information, or opinions expressed in this article are solely those of the author and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial advice contained in this article.
This article was developed in collaboration with Zagga, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
Originally published as How sophisticated investors are accessing the private credit boom