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Private credit in poll position to alleviate housing crisis: KeyInvest
Private credit is no longer the back-up option for housing developers, with many now opting for faster and more flexible funding in the first instance rather than going to the banks as a first option.
Funding for housing development is fundamentally changing because of this, and the knock-on effect from that evolution will likely involve great strides in the alleviation of Australia’s critical housing shortage.
It’s a thematic that has its genesis in regulation. Concerned about the number of building companies going belly-up, APRA recently raised capital requirements for bank loans, which effectively made the transaction less palatable for both sides. APRA’s decision made sense from a financial system integrity angle, but it was also made at a time when the government was catching onto the severity of the nation’s housing crisis; in mid-2023 National Cabinet announced it would build 1.2 million “new, well located” homes by 1 July, 2029.
Initially, private credit providers began filling the void as a second option for developers in need of funding. But as the market has warmed to private debt provision, the narrative has changed according to KeyInvest chief executive Craig Brooke.
“For the first time we’re actually seeing A-grade borrowers who were previously thought of as ‘bank worthy’ coming to non-bank lenders first,” Brooke tells The Inside Adviser. “They’re coming to non-banks because it’s faster, more consistent, more reliable and more flexible. Banks just aren’t perceived to be good at it anymore.”
Brooke estimates private credit providers average out at about 2 weeks approval time for loans, while banks take four to five weeks. At times that 2 weeks approval period, including the deep level of due diligence undertaken, can occur in a matter of days. That speed means more projects get started early, which means volumes go up and costs come down.
But he says it’s the flexibility of private credit loans that is really setting them apart from bank loans.
Banks are relatively clunky institutions in a lot of ways, and lending is one of them. When a development loan is approved, repayments generally must start when the loan is transferred. With private credit, however, the loan can be structured in a way that suits both the lender and the borrower. That means, for example, that for a mid-sized developer borrowing to building a strip of 12 houses, repayments don’t need to start on day one. Depending on the loan agreement, they can start at any of the four credit stages (land acquisition, pre-development, construction and residual).
That flexibility extends further, Brooke explains, because private credit purveyors can offer different models of payment as well.
“They can do interest being capitalised or interest being prepaid, and sometimes, but not often, they’ll also offer interest only payments,” he says. “So there’s a lot more flexibility which means the builder can do the job, get their margins in order and get a better look at return capital before they repay.
“It’s an absolute boon for these development companies,” he adds. “Many of them would be shut out of funding channels without private credit.
Everyone’s a winner
Brooke himself has deep experience in private credit after several decades in the industry. The 146 year-old KeyInvest is more known for providing investment bonds, alongside capital guaranteed products like funeral bonds. The link between those products and private credit – which also involve interest payments and return capital – is strong. Accordingly, the underlying investments are often linked; in KeyInvest’s case, its funeral bond, for example, is “fully extended” on private debt within allocation ranges.
For investors, the effect private credit is having on the national housing shortage also brings sustainability into the equation. “That conscientious investing element spans everyday investors, all the way up to institutional investment at the big super funds,” he says, noting that the $335 billion Australian Super pledged to triple its private credit investment by 2030.
It shouldn’t be forgotten, he says, that income-generating investment vehicles like bonds and private credit will become even more important as those super funds grapple with the Retirement Income Covenant’s requirement to provide adequate decumulation strategies for members.
“We’re working on several ways to provide those income products to more Australians,” he says. “We need more gateways to those products at all levels.”
