In today’s volatile and increasingly correlated markets, traditional portfolio frameworks are no longer delivering the same level of downside protection. The 60/40 model—once regarded as a bedrock of balanced investing—is being re-evaluated by institutional and sophisticated investors alike. The need for modern, resilient defensive strategies to protect income and preserve capital has never been more urgent.
The case for evolving beyond traditional defensive strategies to protect income
Historically, bonds, cash, and occasionally gold have formed the defensive core of multi-asset portfolios. These instruments were expected to cushion losses during equity drawdowns and provide a stable income stream. But in recent market cycles, rising interest rates, inflationary pressures, and global uncertainty have challenged these assumptions.
Persistent volatility and increased correlation across asset classes have led investors to look beyond conventional tools in search of better defensive strategies to protect income and build long-term resilience. This has accelerated interest in alternative asset classes—particularly real estate private credit.
Real estate private credit: a modern tool for capital preservation
Real estate private credit is gaining traction as a compelling solution for investors prioritising capital preservation and income stability. In Australia, the private credit market has surpassed $205 billion1, with over $85 billion2 in commercial real estate credit. This is not a passing trend—it reflects a structural shift in the way capital is being allocated.
As banks retreat from mid-market lending due to regulatory and capital constraints, private lenders are stepping in. These non-bank institutions, often operating with greater flexibility and sectoral expertise, are well-positioned to fill the funding gap—especially in real estate development and transitional lending.
Importantly, many real estate private credit opportunities are structured with floating-rate loans. These structures naturally align with central bank movements, offering an effective hedge against interest rate risk and helping to stabilise income. Unlike traditional bonds, which tend to lose value when rates rise, floating-rate real estate credit adapts with the market, making it a powerful tool in modern defensive strategies to protect income.
Housing undersupply and lending constraints create opportunity
One of the core strengths of real estate private credit lies in the quality of the underlying asset. In Australia, structural housing undersupply and a tightening in development finance have created strong tailwinds for credit investors.
The National Housing Finance and Investment Corporation (NHFIC) forecasts a shortfall of more than 100,000 dwellings by 20273. At the same time, elevated construction costs and reduced bank appetite for development lending are constraining project delivery. This supply-demand mismatch creates attractive conditions for private credit investors to fund high-quality projects—while targeting returns that meaningfully exceed traditional fixed income.
At Zagga, our focus remains on Australia’s Eastern Seaboard, where population growth, infrastructure investment, and robust demand fundamentals provide a resilient foundation for real estate private credit.
A new framework for risk-aware investing
As macroeconomic and geopolitical uncertainties persist, investors are shifting focus from benchmark-chasing to portfolio resilience. That includes enhancing diversification and adopting defensive strategies to protect income through lower-volatility, income-generating assets.
We are seeing a recalibration in asset allocation models. Rather than a fixed 60/40 split between equities and bonds, a growing number of investors are exploring more balanced frameworks that incorporate alternatives and private markets—often in an evenly weighted 25/25/25/25 structure.
Within this context, real estate private credit plays a pivotal role:
- it provides floating-rate income aligned with the interest rate environment
- it offers capital preservation through senior secured structures backed by tangible assets
- and it brings diversification away from public market exposure.
Conclusion: Real estate private credit for today’s market conditions
In a structurally different market environment, traditional defensive approaches are no longer enough. Real estate private credit offers a modern, adaptable solution—combining income, capital preservation, and diversification in one allocation.
For investors seeking effective defensive strategies to protect income, it is time to move beyond outdated models and embrace the evolving role of private credit in long-term portfolio construction. When thoughtfully structured and backed by quality assets, real estate private credit has the potential to deliver both stability and performance—making it a cornerstone of modern risk-aware investing.
