Simon Arraj
The corporate loan market is strong, with an acceleration in business credit growth highlighting the Australian economy remains relatively robust. Rising demand for funding will support returns on private credit, according to Simon Arraj, founder and director of private credit investment manager Vado Private.
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.
Total credit grew 5.7%, the greatest year-on-year growth since May 2023, and up from a recent trough in December 2023 of 4.8%. Credit growth has been gradually accelerating through 2024 despite economists’ prediction of a slowdown.
“Stable economic growth is supporting the demand for credit from businesses, many of which are investing to fund their operations and growth. In addition, forecasts of official cuts in interest rates may further stimulate business investment, which will increase demand for credit,” Mr Arraj said.
“The Australian economy has experienced significant infrastructure investment, including 0housing, renewable energy and transportation such as rail and road. Such projects require substantial capital, often funded by corporate loans.
“Many businesses, post-pandemic, have also been upgrading technology and investing in strengthening supply chains, reshoring production, and increasing inventory levels. This has driven higher demand for working capital and business loans.”
According to Mr Arraj, housing credit growth has slowed in comparison to the rapid increase seen in the pre-GFC period.
“Stricter lending standards, higher house prices, and concerns over affordability have dampened the owner-occupier housing market to some extent, although investor demand for credit remains strong. Changes to investor lending regulations and more cautious consumer borrowing behaviour have also weighed on mortgages growth, rendering business credit growth stronger by comparison, which will continue to support returns on private loans,” he said.
For investors, private credit can deliver investors yields of around 10% per annum, which is more than double the returns on deposits rates paid by banks, which was well below 5% in August 2024, according to separate RBA data.
According to Mr Arraj, private credit can make an important addition to investors’ portfolios.
“Many Australian retail investors would benefit from diversifying their portfolios into higher-yielding private debt away from cash and residential property to reap a superior return on their money. Australian household wealth is largely locked up in property, yet superior risk-adjusted returns are available from private credit,” Mr Arraj said.
Total household wealth rose 9.3 per cent to an all-time high of $16.48 trillion in the June quarter. Net worth was boosted by a record level of property assets of $11.22 trillion, which represented 68.1% of all household assets, up from 61.7% in December 2020. The gain in household wealth has largely driven by rising residential property values in recent years.
“In contrast to residential property, investing in private credit is more accessible to Australians and does not require a large capital investment or deposit. Nor does private credit investment attract a stamp duty tax like buying a property; it is available to more Australians and pays a superior return,” Mr Arraj said.
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