Credit, investment and property risk outlook

NSW continues to grapple with a significant housing shortage.

Economic forecasts project a substantial increase in population over the next five years, further exacerbating the current housing situation.

Ambitious targets have been set by the state government to meet the supply/demand housing imbalance with a strategy focussed on transit-oriented development (“TOD”) being earmarked; this effectively aims to provide planning controls that are conducive to creating additional housing in 31 locations across Sydney that are serviced by metro, railway and commercial amenities.

The state government is aiming to expedite the draft planning reforms which include higher density rezonings in and around locations in metro and greater Sydney. These reforms effectively by-pass local governments, however, backlash by local governments may lead to delays whilst both tiers of government undertake negotiations to finalise these reforms.

Regarding the property sector

The demand for housing remains strong, with continual escalation of prices across the residential rental sector being witnessed alongside property values holding steady, and in some cases, increasing slightly. We remain confident that market dynamics continue to underpin the demand for property and values will remain resilient.

We note, sales prices are being achieved for completed dwellings, and in many instances, continue to out-perform initial project valuations. The potential end of the interest rate hiking cycle, a slight fall in the inflation rate and recent auction clearance rate have also assisted in bolstering consumer confidence in the property sector, signalling a favourable outlook.

The conversion of developer pipelines isn’t without some challenges, as they continue to deal with higher construction costs, selecting the right builder, supply-chains for labour and materials, and increased funding costs.

Capital availability continues to lag demand, underpinning market dynamics in the private credit sector. The future supply of housing which the state government wants to push into the marketplace hinges upon the ability to ‘fill the funding gap’. This creates an abundance of opportunity for private credit real estate investors.

NSW, specifically Sydney, remains a focal point for Zagga due to its favourable conditions in our preferred mid-market space. We continue to place strong emphasis on projects executed by experienced and reputable counterparties.

We remain vigilant when assessing and managing the loan portfolio, in particular, construction loans. We have a strong focus on issues facing developers, builders and trades including cost and time management.

Retail capital availability for completed dwellings remains strong with a healthy and deep appetite from marketplace lenders (banks and non-banks) and as a result we’ve not had rise for concern on buyers’ ability to settle. The deep pool of liquidity for residual stock also continues to underpin the non-bank market giving developers many options for the retention, sale, gradual paydown, or refinance of completed stock.

In other news, it is interesting to note that innovative ideas, such as land-lease communities, are gaining traction, with potential implications for future property ownership structures. A concept being discussed to help address rising property values is providing the option for individuals to own the house (a depreciating asset), and instead, pay rent on the land (an appreciating asset). This strategy has been trialled in Canada and New Zealand and is an option the private sector and government are exploring.

Looking forward, we remain buoyed by the market opportunity for us to fund many future projects.

We remain committed to our conservative approach in selecting quality investments targeted at delivering consistent returns, at a moderate premium to the cash rate without a commensurate increase in risk.

As always, we will retain our investor first approach.

Please do not hesitate to reach out should you have any questions or require further clarification.

This article is for information purposes only. It does not take into account your objectives, financial situation or needs. Any opinion expressed in this article are of the author and is subject to change without notice. Readers are reminded to exercise caution and use their own judgment when interpreting and applying the information contained in this article.

Stay Connected

Could this be the answer to the housing crisis?

Australia is still in the midst of a housing crisis. House prices have risen for 15 consecutive months. Rents are soaring. Demand is outstripping supply. Alan Greenstein talks to Sean about the potential for private credit to make a difference to the housing crisis.

Slower growth confirmed as the housing shortage intensifies

The Australian economy has continued to track at a low growth rate with inflation continuing to ease. As a result of these trends, the RBA has moved to a clear neutral bias dropping the ‘next move is likely to be up’ comments at its March meeting.