Demand for Real Estate Private Credit continues to grow

We spoke about a lot of things: Balmain, who we are, what we offer investors and more broadly trends in private credit and lending, see more about this article here.

You may have read some of this already, but if you haven’t, here are a few of my opinions that  I shared with Michael:

• Australia’s real estate private credit market will quadruple over the next five years as commercial banks take a smaller share of a growing demand for loans;
• the clear strength of demand to invest in real estate private credit means that this sector will grow from about 5-6 per cent of the Australian credit market up to about 20 per cent, in line with market penetration in Europe and the US; and,
• Balmain is a keen supporter of greater regulation of the private credit sector.

So, what should we expect going forward for our investors, and will the demand in real estate private credit continue?

The banks are blessed with billions of dollars of non-interest-bearing deposit accounts (the cheapest form of borrowing!) and, buoyed by government guarantees and favourable APRA capital requirements, the major banks are able to borrow 96.50% of their total exposures (the Australian Prudential Regulation Authority or APRA currently requires a minimum Tier 1 leverage ratio of 3.5% for major banks:  This means banks only need to hold just $3.50 of Tier 1 capital for every $100 of total exposures).

So, with oodles of gearing and a chunk of that gearing effectively ‘free’, the major banks can profitably lend at rates that private credit providers can only dream about.  For this reason, private credit tends not to want to directly compete with the banks in asset classes that the majors adore (say, prime residential).  One of the many reasons that private credit avoids direct bank competition is that, when they turn their mind to it, they can price cut a sector and drive out any competition.  No-one else has that luxury.

But everywhere else in real estate debt (development, construction, commercial, anything slightly complex) both APRA guidelines and the Royal Commission (published in February 2019) have forced a ‘retreat’ by the banks which has created a great opportunity for private credit investors.  And, to be clear, this is not a trend unique to Australia.  Private credit already enjoys significantly greater market share in both the US and Europe as government protection afforded to the banks was never as prevalent in those jurisdictions.

To highlight the growth in private credit, take Balmain’s own experience.  In the first quarter of FY26 Balmain originated over $1.2bn of senior commercial loans, up 20% from this time last year.  This occurred in the same quarter that Balmain’s funds under management exceeded $4bn for the first time.

How does this impact on Balmain’s investment products?

‍Whether you invest in Balmain Private or Balmain Opportunity Trust, the underlying strength of Balmain’s growth reflects not only this structural shift in Australia’s real estate credit market away from the major banks and towards private credit but also the underlying strength of the Australian residential property market which remains, at this point in time, the envy of the world.

Balmain remains well-positioned to deliver strong risk-adjusted returns and diversified exposure to real estate debt predominantly secured by residential collateral.

Does Balmain embrace regulation of the private credit sector?

‍Any market enjoying strong growth will attract newer and less well-credentialed participants.  Private credit is no exception but before I expand on that, let’s review the current position.

Chapter 5C of the Corporations Act, and other provisions of the Corporations Act, (which for simplicity is referred to hereon in as C5C) protects retail investors.  “Retail investors” is defined as basically everyone except sophisticated investors (more of that shortly).

These protections can be summarised as follows:

1. Registration and Responsible Entity
   The scheme must be registered with ASIC if it is offered to retail clients.
   A public company with an Australian Financial Services Licence (AFSL) must be appointed as the Responsible Entity (RE). The RE is legally responsible for operating the scheme in compliance with the Corporations Act, the scheme’s constitution, and the compliance plan.
2. Compliance Plan
   Every registered scheme must have a detailed compliance plan, which sets out measures to ensure compliance with the Corporations Act and the scheme’s constitution.
   The compliance plan must be lodged with ASIC and audited annually by an independent auditor.
3. Product Disclosure Statement (PDS)
   A PDS must be provided to retail investors before they invest. The PDS must comply with Division 2 of Part 7.9 of the Corporations Act and clearly disclose all relevant information about the scheme, including risks, fees, and rights.
4. Constitution and Compliance Committee
   The scheme must have a constitution that meets the requirements of the Corporations Act.
   If the RE’s board does not have a majority of external directors, a compliance committee with a majority of external members must be established to oversee compliance with the plan.
5. Custody of Scheme Property
   Scheme property must be held by the RE or an independent custodian to safeguard investors’ assets.
6. Financial and Audit Requirements
   The RE must meet minimum net tangible asset requirements and maintain professional indemnity insurance.
   Annual financial statements and compliance plan audits must be lodged with ASIC.
7. Ongoing Disclosure and Reporting
   The RE must provide ongoing disclosure to investors, including periodic and annual reports, and must comply with continuous disclosure obligations.
   Any “reportable situations” (e.g., breaches of the Act, the compliance plan, or the constitution) must be reported to ASIC as required by section 912D of the Act.
8. Investment and Lending Restrictions
   The scheme must only invest in assets and deal in scheme assets as set out in the constitution, the Corporations Act, and the PDS.
   Lending and investment decisions must be approved in accordance with the scheme’s lending guidelines and reviewed regularly by the Credit & Investment Committee.
9. Dispute Resolution
   The RE must be a member of the Australian Financial Complaints Authority (AFCA) to provide external dispute resolution for retail investors.

There is much debate over whether these protections are sensible and/or adequate but they are a good starting point.  The difficulty arises when you consider the “sophisticated investor” exception.  If the investors in a scheme are sophisticated, then C5C does not apply to that scheme and the “sophisticated investors” are not protected.

To be a sophisticated investor 20 years ago, you needed net wealth of $2.50MM or annual earnings exceeding $250,000.  Only 1.90% of investors were deemed “sophisticated“ and therefore not protected by C5C.  In the past 20 years, these thresholds have not changed.  It is estimated that 20% of investors are now “sophisticated” (and unprotected by C5C).

There is consequently a loop-hole that can be exploited by newer entrants to private credit lending … “the sophisticated exemption to avoid retail and avoid regulation”!

For our part, Balmain will be converting its current wholesale scheme (Balmain Opportunity Trust) to a retail scheme (the same as Balmain Private).  Does this help Balmain in any way?  Not really.  It means more compliance, regulation and reporting which is a lot more work.  We are doing it to elevate our own responsibilities and to ensure that all of our investors are protected by C5C.

We are also doing it in the hope that less compliant private credit managers will lift their collective games and follow suit.  We want a strong industry not a playground for unregulated “players”.

In closing, Balmain thanks you for your ongoing support and we look forward to sharing more opportunities with you as the markets continue to grow and evolve.

Kind Regards

Andrew Griffin
Chief Executive