Business and home lending accelerate in a sign of robust economy and despite higher interest rates

Growth in business and housing credit has accelerated from year-ago levels despite higher interest rates, with still favourable funding conditions encouraging businesses and property investors to borrow, according to Tim Keith, Managing Director of private credit fund manager Capspace.

Data from the Reserve Bank of Australia (RBA) reveals growth in business credit of 7.7% over the year to August 31, 2024, up from 7.4% a year ago. That compares to growth in home lending of 5.0%, up from 4.3% in August 2023, and personal credit growth of just 2.5%, up from 1.3% a year earlier, according to data released today by the Reserve Bank of Australia (RBA).

“Strong demand for business credit has been driven by resilience in the economy since post-COVID economic stimulation and many sectors continue to perform strongly and the demand for labour remains high, with the labour market still tight,” said Mr Keith.

“Having said that, we feel that the demand for business credit may be at its peak, along with official interest rates. However, the demand for private credit will remain as business value speed and simplicity in seeking funding for investment and growth over the difficulty of dealing with banks,” he said.

“The demand for capital is strong relative to its supply, which will continue to favour returns on private credit lending,” he said.

According to Mr Keith, private credit investments have delivered relatively attractive yields in recent years given such loans typically pay floating coupons, or interest returns that are linked to market interest rates.  That contrasts to falling term deposit rates, which have fallen well below 5%.

Reserve Bank data reveals that the average advertised interest rate on one-year term deposits fell to 4.3% in August from 4.5% in July, three-year rates, while the average advertised rate on three-year term deposits fell to 3.8% from 3.95%. 

“As investors approach retirement, many are looking for ways to transition to higher-yielding fixed income investments away from cash and residential property which dominates Australians’ wealth portfolios; Australians hold close to 70% of household wealth in property, far more than Americans, for example, who hold just 29% of their net worth in real estate, official US data shows,” he said.

“One of the key advantages of private credit is the access to regular monthly income at higher yields, which can provide retirees with a steady and reliable cash flow,” Mr Keith said.

Yields on many private credit funds sit at around 10% per annum and that is especially attractive with falling term deposit interest rates,” Mr Keith said.   The Capspace Debt Fund yielded a return of 9.31% p.a. in September with interest paid monthly.

Private debt consists of privately originated corporate loans across a range of risk-return profiles. These loans are not traded on the public markets, unlike corporate bonds.  The private debtmarket has grown rapidly; assets under management for the global private debt market topped US$2.1 trillion (A$3.15 trillion) in 2023.

“Private credit, or non-bank lending to companies, offers Australian investors an attractive and regular income stream and capital protection through stringent loan process, and for that reason can offer investors very attractive risk adjusted returns which smart investors are including in the fixed-income portion of their portfolios, ” Mr Keith said.