Simon Arraj

Simon Arraj, Founder and Responsible Manager of Vado Private, believes further cuts in interest rates this year could stimulate construction activity and help to lift housing supply in Australia’s biggest cities, which face a crucial shortage of homes.

New data from the Australian Bureau of Statistics (ABS) reveals 43,517 dwellings were completed in the March quarter in seasonally adjusted terms, down 4.7% from a year earlier. That also compares to more than 47,000 dwellings completed in March 2020 and around 45,600 in March 2021.

“While we are still seeing lower building approvals for dwellings compared to four or five years ago, the restriction in housing supply could ease if interest rates continue to fall. This could encourage greater housing construction, which is essential to alleviating the shortage of housing accommodation in Australia,” Mr Arraj said.

“Having said that, new housing supply is currently near decade lows, with only 177,000 new homes completed in 2024,” he said.

The lacklustre figures come as Australia marks one year into the five-year National Housing Accord, in which states and territories must build a combined 1.2 million well-located homes by June 30, 2029. The National Housing Supply & Affordability Council (NHSAC) has released^[1] its 2025 State of the Housing System report, which expects only 938,000 dwellings to be built nationwide by mid-2029. The Urban Development Institute of Australia (UDIA) 2025 State of the Land Report^[2] has separately forecast a supply shortfall of around 400,000 dwellings for the combined capital cities by 2029, driven by persistent underbuilding relative to population growth and ongoing challenges in the construction sector.

“Given this shortage, we could see further gains in property prices in Australia over the reminder of the year, especially if the central bank cuts interest rates again. ” Mr Arraj said.

“Whether this happens is not clear. The central bank may not want to risk re-igniting inflation, and therefore it could keep interest rates on hold in the second half of 2025. The RBA’s inflation target of 2% to 3% remains a key focus,” he said.

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Notes:
[1] https://nhsac.gov.au/sites/nhsac.gov.au/files/2025-05/ar-state-housing-system-2025.pdf
[2] https://udia.com.au/2025/03/udia-state-of-the-land-report-shows-housing-crisis-will-deepen-over-the-year-ahead-due-to-multi-faceted-challenges/

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At its May meeting, the Reserve Bank of Australia’s (RBA) Monetary Policy Board decided to lower the cash rate target by 25 basis points to 3.85 per cent and financial markets are betting on more official rate cuts this year.

Share markets are more unpredictable, so many people are saving their money in fixed-term deposits and other cash accounts, but they are still earning less than what inflation reduces the value of their money, so they are effectively losing purchasing power, according to Mark Zukerman, Director and Head of Funds Management, Vado Private.

“With interest rates on online savings accounts now typically returning around 1.5%, and interest rates on term deposits across all maturities averaging just 3.1% in April 2025, that exposes many savers to very low returns, potentially falling below zero given inflation of 2.4%,” Mr Zukerman said.

“While inflation is expected to settle around the middle of the RBA’s 2% to 3% target range, the RBA said that it expects the CPI to increase for a short period when cost-of-living support measures end. That will work to lower the real returns on cash investments,” he said.

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Simon Arraj

Australians household wealth hit a record high in the December quarter of 2024 at $16.95 trillion, with property accounting for 67% of wealth, exposing Australians to a risk of wealth erosion if property prices fall, according to according to Simon Arraj, Founder of Vado Private.

Household wealth rose by $143.6 billion during the December quarter, up 6.5% year-on-year, new data from the Australian Bureau of Statistics shows.  Net worth was boosted by a record level of residential dwellings and land totalling $10.60 trillion, up around 5% from a year earlier while cash investments also hit a record at $183.85 billion.

“The data reveals households are holding high levels of cash despite falling interest rates. Household cash and deposits investments struck $183.85 billion, jumping 8.3% from a year earlier. Australians are devoting more of their money to an asset class that is yielding real returns close to zero,” Mr Arraj said.

“At the same time, more than two-thirds of household wealth is now locked up in bricks and mortar, a proportion which has increased in recent times as property values have risen, boosting demand for housing credit in 2024. Australians’ demand for property is growing, despite generally yielding a return of less than 5% p.a.,” Mr Arraj said, adding that slowing in property price growth posts risk to wealth gains.

“With such a large proportion of household wealth tied up in property and cash, it makes sense for Australians to diversify their assets into higher yielding investments, which can deliver reliable income and protect against the share market falls we’ve seen this year and which could continue,” Mr Arraj said.

The Australian share market has dropped around 3.0% over the 2025 year to 27 March, as measured by the ASX/S&P200. In the US, equity markets have also dropped, led by technology shares, with the Nasdaq Composite Index down around 7.3% over the year to date, and the S&P 500 down 2.8%.

According to Mr Arraj, private credit funds can offer investors relative stability and regular income, with yields between 8% and 10% per annum, higher than those offered property or corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned around 5.9% over the year to 26 March 2025.

“Private credit, or non-bank lending to companies, can offer Australians attractive risk-adjusted returns. Importantly in the current times of greater share market volatility, investing in private credit can reduce the risk of equity losses during downturns,” he said.

“This represents an attractive opportunity for investors to benefit from regular income while their capital is protected by loans’ senior secured position at the top of the capital stack. Moreover, with interest rates on savings accounts so low, typically yielding less than 2% p.a.,

well below the inflation rate of around 2.5%.

“Investors would also be wise to remain cautious about equities moving ahead. Heightened uncertainty about US trade tariffs and a slowing Australian or US economy may cap share market gains and even see them correct even more this year. Private credit can provide much calmer waters for investors than share markets,” Mr Arraj said.

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Simon Arraj

Investors should be positioning their portfolios to include more defensive investments in what could be a more volatile year for shares in 2025 after a sharp drop in share prices in the US overnight and on the Australian Stock Exchange yesterday, according to Simon Arraj, Founder and Responsible Manager of Vado Private.

The Dow Jones Industrial Average (DJIA) fell more than 1,100 points and the S&P 500 dropped 2.9% after the US Federal Reserve signalled it might keep interest rates higher than investors expected in 2025. The DJIA index fell for the 10th straight session, its longest losing streak in five decades, after the US Fed disappointed investors by signalling just two more cuts next year.

The VIX Index, a common measure of share market volatility, surged  74% overnight, to its second highest level this year. The US dollar also increased  to a two-year high amid the risk-off sentiment.

According to Mr Arraj, share markets might experience even more volatility next year and investors should be reallocating to more defensive assets to protect their portfolios.

“The complexities of a second Trump administration and changes to global trade relationships could further dent share markets in 2025. If inflation reemerges under a Trump presidency, we may not see the expected interest rate cuts from the US Federal Reserve, which could set back share markets. The risk of recession too still lingers in Australia if the central bank decides to leave interest rates higher for longer,” he said.

“Share markets are vulnerable here and in the US, where high valuations expose investors to a correction in markets.

“Market consensus expects earnings growth in 2025 to be low for Australian banks and moderate for ASX 200 listed companies, so shares look expensive at current valuations. As a result, investors may need to consider rebalancing portfolios with a greater allocation to defensive assets such as private credit to protect their portfolios against greater volatility and to preserve capital,” he said.

Private credit, a form of fixed income linked to real estate and corporate lending, can provide attractive yields with lower volatility. “For income-seeking investors, private credit investments can deliver attractive yields around 8-10% per annum, significantly higher than typical yields on shares or property,” said Mr Arraj.

Private credit assets have historically demonstrated lower volatility of returns compared to shares and bonds and are therefore considered defensive, according to research from the IMF. Both the US Fed and Reserve Bank of Australia have given the private credit sector a cautious stamp of approval, stating it provides funding to businesses where needed and that the financial risks associated with the sector are relatively low compared to other debt markets.

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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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Simon Arraj

Australia’s superannuation savings struck a record high in the June quarter of $3.94 trillion, more of which is being invested in private assets as superannuation funds seek to diversify their portfolios out of equity and bond markets, according to according to Simon Arraj, founder and director of private credit investment manager Vado Private.

Household  wealth rose by 1.5% during the quarter to an all-time high of $16.48 trillion, new data from the Australian Bureau of Statistics shows.  Net worth was boosted by a record level of property assets of $11.22 trillion as at 30 June 2024, which represented 68.1% of all household assets, up from 61.7% in December 2020. The key driver of household wealth gains in recent years has been rising property prices.

Households also held $1.72 trillion in cash and deposits and a record $3.94 trillion in superannuation assets, or around one quarter of total household wealth, up from $3.92 trillion in the March 2024 quarter.

“The superannuation industry is growing, and in recent times, assets under management have been boosted by rising compulsory contributions and a very robust jobs market. As super funds seek to diversify their huge portfolios, more of their funds are being invested in private assets such as private debt and equity, which now comprise around a fifth of Australian pension funds’ A$3.9 trillion of assets, both locally and offshore, according to recent estimates from Bloomberg,” Mr Arraj said.

“As pointed out by Australia’s Reserve Bank today in its Financial Stability Review, ‘recent defaults experienced by private credit investors have been less frequent relative to other comparatively risky investments in the leveraged loan or high-yield bond markets’.

“That could help to explain why Australia’s largest institutional investors are allocating more to private credit assets including Equip Super, UniSuper and AustralianSuper. Just last month, Australian superannuation fund Equip Super said it plans to invest billions of dollars in private markets investments over the next few years and some of that will flow into private credit funds,” Mr Arraj said.

Private credit, or non-bank lending to companies, can offer retiree and other investors an attractive risk-adjusted returns… Importantly too, investing in private credit can reduce the risk of equity portfolio losses during periods of downturns in either property or stock markets.According to Mr Arraj, many private credit funds offer yields between 10% and 12% per annum, higher than those offered by cash, direct property or corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 8.65% over the year to 24 September 2024.   “This represents an attractive opportunity for investors to benefit from regular income while their capital is protected by loans’ senior secured position at the top of the capital stack. Stringent loan processes and security taken over borrower assets provide a degree of capital protection,” he said.

“With such a large proportion of household wealth tied up in cash holdings and residential property, both low yielding investments, it also makes for Australians to diversify their assets into higher yielding investments,” Mr Arraj said. “Over time, retail investors could follow the lead of Australia’s largest superannuation funds given the attractions of this asset class.  The key for investors is to conduct due diligence and find a specialist investment manager that can deliver attractive risk-adjusted returns from private credit over time.”

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Simon Arraj

Business credit growth in Australia has gained momentum and is well above its average since the global financial crisis, with the Reserve Bank of Australia (RBA) noting that funding conditions for business are favourable. This will support risk adjusted returns from private debt, according to Simon Arraj, Founder and Director of private credit investment manager Vado Private.

In its recent board meeting, the RBA noted that while business insolvencies had increased, including for medium-sized enterprises, they are still below their pre-pandemic trend. “Business credit growth had picked up and [is] well above its average since the global financial crisis. Funding conditions more generally for Australian financial and non-financial corporations remained favourable,”  the Minutes of the Monetary Policy Meeting of the Reserve Bank Board reveal^[1].

According to Mr Arraj, this is very positive commentary from the central bank. “This robust growth in business credit signifies a healthy and expanding economy, as businesses seek funding to fuel their operations and capitalise on growth opportunities,” he said.

“Demand for business credit remains strong, reflecting a robust business environment. This demand is driven by factors such as capex, equipment purchases, increased investment in technology and expansion of businesses into new markets. It is this activity that is supporting returns on investments in private debt funds,” he said.

Data from the RBA reveals business credit growth is easily outstripping growth in housing credit. Seasonally adjusted growth housing credit grew just 4.7% in June this year from a year earlier, while personal credit, which includes credit card lending, grew by just 2.8%. In contrast, business credit (lending to non-financial businesses) grew strongly, by 7.8% over the year.

“Despite higher interest rates, credit quality generally across the Australian economy remains high with non-bank lenders performing an important role  by funding business operations and growth,” Mr Arraj said.

This is validated by stress testing of non-bank lending in Australia conducted by the RBA. The RBA’s analysis, published in April 2024^[2], found that the overall risks to financial stability posed by the non-bank financial institutions  (NBFI) sector in Australia “remains contained”. The central bank concluded that the size of riskier NBFI activities in the Australian financial system remains modest.

The robustness of business lending in Australia supports returns on private lending. With interest rates on private debt typically floating rate, investor returns have increased with official RBA rate rises, according to Mr Arraj.

“Private credit investments can deliver investors yields of around 10% per annum, which is more very attractive compared to yields on cash investments of less than 5% and investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index^[3], which returned 6.8% over the year to  31 July 2024,” he said.

The RBA in its recent meeting minutes also noted that conditions in residential construction remained challenging. New dwelling supply had weakened, and ongoing cost pressures and labour shortages were constraining residential dwelling construction. While there was still strong growth in underlying demand for housing, this had diminished slightly as the average household size had increased, possibly in response to higher rents and housing prices, the RBA noted.

“The demand for well-designed and constructed projects in desirable locations remains strong. Despite feasibilities being tested, we are starting see more normalised conditions with respect to construction costs. This dynamic combined with the demand and supply mismatch is elevating demand from property developers. This is great for private credit investors who are generating double-digit returns when financing these types of loans,” said Mr Arraj.

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Notes:
[1] https://www.rba.gov.au/monetary-policy/rba-board-minutes/2024/2024-08-06.html
[2] https://www.rba.gov.au/publications/bulletin/2024/apr/financial-stability-risks-from-non-bank-financial-intermediation-in-australia.html
[3] https://www.spglobal.com/spdji/en/indices/fixed-income/sp-australia-investment-grade-corporate-bond-index/#overview

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Simon Arraj

Investors are piling their money into residential property despite higher interest rates, with the annual growth in the value of investor home loans rising 30% in June from a year earlier, outpacing demand from owner-occupiers, including first home buyers, who are being priced out of the market, according to Simon Arraj, founder and director of private credit investment manager Vado Private.

New official data released reveals that the value of new owner-occupier loans grew by 0.5% to $18.2 billion in June, while the value of new investor loans jumped 2.7 % to $11.0 billion during the month.  Over the year, the value of new investor loans surged 30.2%, while owner-occupier loan values rose 13.2%, data from the Australian Bureau of Statistics (ABS) shows. The value of loans to first home buyers rose just 3.4% from a year earlier.

New South Wales is leading the nation in terms of loan sizes. Over the past 12 months, NSW continued to have the highest average loan sizes for both owner-occupiers and investors. In June, it rose to $780,000 for owner-occupiers and $818,000 for investors, compared to $636,600 across Australia, $604,300 in Victoria, Queensland’s $599,300, $545,800 in SA, $566,700 in WA and $467,500 in Tasmania.

“Despite higher interest rates, the investor demand for housing is very strong. While the cash rate has increased 4.25 percentage points since early 2022, investors are still investing heavily in bricks and mortar. Notwithstanding this, house prices could consolidate from their record levels, as the Australian economy slows and higher rates feed through the economy. This raises the importance of diversifying investments out of property, which is fully priced, into higher yielding assets,” Mr Arraj said.

Reflecting Australians’ love affair with property, recent data from the Australian Bureau of Statistics reveals that household net wealth was a record $16.2 trillion in the March 2024 quarter, boosted by a record level of property assets of $11.0 trillion. As a proportion of household wealth, residential property comprises 67.9%, up from 61.7% in December 2020. The key driver of household wealth gains in recent years has been rising property prices.

“With such a large proportion of wealth invested in property, investors  should consider diversifying into other asset classes which can deliver a higher income. Unlike yields on residential property, which generally fall below 5%, the yield on private credit investments can sit at around 10% p.a, more than double the average yields on 1 or 3-year bank term deposits,^[1] and well above the yield on Australian investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which was 6.8% over the year to  31 July 2024,”^[2] Mr Arraj said.

“Broadly speaking, an allocation to private credit can potentially enhance risk adjusted returns, as well as boost diversification and provide a consistent income stream. That is why it’s so important for retirees and other retail investors to better understand the resilient returns offered by private credit. With significant exposure and weighting to Australian property, shares and cash, SMSFs, and other investors would arguably benefit from greater allocations to private credit investments,” Mr Arraj said.  “The key for investors is to conduct due diligence and scope a specialist investment manager that can deliver attractive risk-adjusted returns from private credit, over time.”

According to 2024 research from the IMF, The Rise and Risks of Private Credit in its Global Financial Stability Report^[3], since the Global Financial Crisis (GFC), direct lending (the most common type of private credit globally), has provided higher returns and lower volatility compared to both leveraged loans and high-yield corporate bonds. The chart below displays the relatively higher returns of private credit compared to equities since 2000.^[4]

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Notes:
[1] https://www.rba.gov.au/statistics/tables/xls/f04hist.xlsx?v=2024-07-31-12-01-58
[2] https://www.spglobal.com/spdji/en/indices/fixed-income/sp-australia-investment-grade-corporate-bond-index/#overview
[3] https://www.imf.org/en/Publications/GFSR/Issues/2024/04/16/global-financial-stability-report-april-2024?cid=bl-com-SM2024-GFSREA2024001
[4] https://www.imf.org/en/Blogs/Articles/2024/04/08/fast-growing-USD2-trillion-private-credit-market-warrants-closer-watch22222

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