Data from the Reserve Bank of Australia (RBA)^[1] released on Friday reveal growth in business credit of 7.5% over the year to September 30, 2024, up from 6.8% a year earlier, easily outstripping growth in home lending of 5.1% (up from 4.2% a year earlier) and personal credit growth of 2.4%.

The RBA recently estimated^[2] the private credit market in Australia is worth around $40 billion in outstanding debt, or around 2½ per cent of total business debt, though that could grow to 5% in 2025, using the same RBA analysis, according to Mr Keith.

“I think private credit could account for up to 5% of overall business lending in Australia by the end of next year,” Mr Keith said. “Still, the industry is far bigger in the US where private lending accounts for a significant portion of business lending. Looking ahead, if private credit lenders can obtain deeper funding pools and a bigger portion of Australian investors’ portfolios, then growth could accelerate as banks will not be able to match the speed and flexibility of private lenders,” Mr Keith said.

According to Mr Keith, private business loans offer some advantages over bank loans for small and medium sized businesses (SMEs). “Lending from their funds’ capital, private credit managers can act much more quickly than banks and they are far more flexible in the businesses to whom they lend. By comparison, banks move far more slowly and can restrict the capital they allocate to SMEs versus other market segments such as home loans,” Mr Keith said.

“Private credit lenders also offer more tailored financing solutions compared to the rigid lending criteria applied by Australia’s big banks. Private credit funds typically offer more customised lending, collateral arrangements, and repayment schedules to match the specific needs of borrowers.”

Drawing investors to private credit are yields that between 8% to 10% in recent years. According to the US Federal Reserve:^[3] “Over the past decade, the asset class, particularly direct lending, has generated higher returns than most other comparable asset classes, including 2% to 4% over syndicated leveraged loans. Borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customisation that private lenders offer. Additionally, private debt funds have attracted highly leveraged borrowers that are unable to get adequate funding from heavily regulated banks.”

Mr Keith said: “Private credit returns have been attractive, with some of the highest historical returns across debt markets and those have been delivered with relatively low volatility to investors. For this reason, the private debt market has attracted investment from industry superannuation funds in Australia which have readily diversified into this asset class.”

Private credit investments also offer potentially higher returns than cash investments such as term deposits and residential property.  “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 9.30% p.a. in October with interest paid monthly.

The Australian financial services regulator ASIC isn’t expected to significantly increase the regulation of private credit funds in 2025, though it will likely insist funds deliver greater transparency over the make-up of the loan portfolios and bad debts as the industry accounts for a greater proportion of business lending, Mr Keith said.

“I don’t think that the market will be heavily regulated as it is still small comparatively to other investment markets. However, private credit could be required to offer investors greater transparency over the loans they grant. ASIC will likely keep pushing funds to declare when loans go bad and disclose more detail of the loans that funds hold within their portfolios.

“I would expect that as transparency in this asset class grows with ASIC oversight, additional investors including those in retirement such as self-managed superannuation funds (SMSFs) will be attracted to private credit given the returns on offer,” Mr Keith said.

———

Notes:
[1] https://www.rba.gov.au/statistics/frequency/fin-agg/2024/fin-agg-0924.html
[2] https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html
[3] Ibid.

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New data from the Australian Taxation Office (ATO) also reveals a near record level of share investments, which could leave SMSF investors vulnerable in the face of economic uncertainty and any correction in share markets.

Despite overall SMSF assets surging to a staggering $990.4 million in the June quarter of 2024, a worrying 16.4% – a record $162.4 billion – is languishing in cash and term deposits. According to the official data, SMSFs ploughed another record $157.8 billion into direct property, representing 16% of their total assets. The ATO data also shows SMSFs invested $293.9 billion in Australian and overseas shares, accounting for around 30% of total assets.

However, Mr. Keith said it is important for SMSFs to incorporate fixed income investments into portfolios to provide a defensive buffer against market fluctuations.

“This overreliance on property, shares and cash raises red flags about diversification and risk management for SMSFs,” Mr Keith said.

“A balanced portfolio is crucial for long-term financial security, and fixed income assets offer stability and regular income in the face of economic uncertainty and share market volatility. However, with just $12.1 billion invested in debt securities and another $6.3 billion in loans, SMSFs are still largely ignoring fixed income investments; these are tiny amounts given that SMSFs have almost a trillion dollars in assets under management,” he said.

With such high allocations to Australian property, shares and cash, SMSFs would arguably benefit from investing more in fixed income, which can deliver higher yields than property or term deposits with far less volatility than shares, according to Mr Keith.

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

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

“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. 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.”

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 debt market 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.

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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.

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House price data for the second quarter released by the Australian Bureau of Statistics reveals the average national price of residential dwellings rose by $15,600 or 1.6% to $973,300 during the June quarter. Prices were highest in NSW, with a mean residential dwelling price of $1,222,000 in the June quarter, rising around 1% from $1,210,500 in March. NSW was followed by the ACT with an average dwelling price of $953,900, up from $946,300, then Victoria with an average of $900,300, falling from $906,900.

Dwelling prices surged 6.2% in Western Australia, rising to $816,000 from $768,300. South Australia also showed very robust growth of 4.2% in average dwelling prices to $800,400, up from $768,000 in the March quarter. In Queensland, the average dwelling price rose 3.6% to $885,400 up from $854,900 in the March quarter. The lowest average dwelling price was in the Northern Territory at $538,000, up from $530,400.

Tim Keith, Managing Director of Capspace, said continued evidence of high construction costs and a decline in residential construction activity since 2021 means housing markets around Australia are undersupplied, putting upward pressure on property prices in most cities. “Building approvals are simply not keeping up with demand and as a result, property prices in most capital cities are expected to rise over the next two years,” he said.

“However, Melbourne house prices could continue to show weakness in the short to medium term, as already indicated by this ABS data, with higher interest rates deterring some potential buyers, though this could present an entry point for new homebuyers, as affordability rises.”

Research conducted by Performance Property for Capspace reveals expected price gains for housing in some cities. Perth is expected to reap aggressive house price growth of at least 25% in the medium term, leading to a median price reaching over $900,000. The Sydney house market will remain stagnant with unaffordability high, though Sydney units are still capable of 20% price growth and could reach a median price of $950,000.

Adelaide property prices could grow about 10% before reaching a peak in the short to medium term while Brisbane can expect moderate growth in the medium term of 20%, reaching a median price of $1,000,000, according to Performance Property.

Capspace uses property as security on loans that it offers customers, so it is important for the private lender to continually research and understand the property market. While property owners have benefited from price rises, investors should consider diversifying their portfolios into other assets, according to Mr Keith.

Australians have stockpiled their wealth in property; around two-thirds of household wealth is now held in residential property, a proportion that has increased over time with rising property values.  “With such high exposure to residential property, many Australians are vulnerable to a correction in the property market over the longer term, especially if the economy slows and the unemployment rate continues to rise,” Mr Keith said.

According to Mr Keith, Australians should be devoting more of their household wealth to fixed income assets such as private credit to diversity their investment risk and to reap more attractive income yields.

“Private credit can deliver investors yields close to 10% per annum and investors understand their capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” said Mr Keith.

The variable interest rate of return on the Capspace Private Debt Fund was 9.3% in July, well above prevailing interest rates on term deposits. “For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors higher yields,” said Mr Keith.

“Private credit also offers diversification into a defensive asset class with features and characteristics that can help to offset any correction in share markets. Additionally, it offers opportunities to younger and older investors such as SMSFs as they can invest much smaller amounts of money, unlike property investments which due to their expense are beyond the reach of many Australian,” he said.

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According to Mr Keith, another interest rate rise is possible after the Reserve Bank of Australia Governor Michele Bullock said in an Opening Statement to the House of Representatives Standing Committee on Economics^[1] that inflation has not been this high for a few decades and is hurting everyone.

“I think many people have forgotten how bad it is – some younger people will not have experienced high inflation at all. There is a reason why there is so much talk about the cost of living – high inflation hurts everyone,” she said.

“It reduces what people can buy with their wages, erodes the value of savings, and it disproportionately hurts those on low or fixed incomes. This is why it is imperative that we do what we need to ensure inflation returns to levels at which it is in the background again,” Ms Bullock said.

“Ultimately, our full employment goal is not served by letting inflation stay above target indefinitely. So, the Board remains focused on the potential upside risks to inflation.”

According to Mr Keith, with another rate rise potentially looming, Australians need to be prepared to take action on their investments to achieve higher returns.

“Arguably those close to retirement should be devoting more of their investment portfolios to fixed income assets including private credit to boost the after-tax return on savings,” Mr Keith said. Private credit investments, with returns driven by corporate loans, benefit from higher interest rates given rates on such loans typically pay floating coupons, or returns that are linked to official interest rates. So arguably retirees’ investment strategies and those of self-managed superannuation funds should consider diversification into private credit investments, which can deliver investors yields close to 10% per annum.”

“This is especially appealing for investors seeking income, given term deposits are generally currently returning less than 5%. The average advertised interest rate on three-year term deposits was just 3.95% in July 2024, and the one-year rate was a little higher at 4.60%, slightly above the official inflation rate of 3.8%, according to data from the Reserve Bank^[2] .  In contrast, the yield earned on private credit could increase over the next 12 months, with current returns of 8% to 10%” Mr Keith said.

More defensive assets such as fixed income, and private credit particularly, may deliver more attractive yields than property, cash or fully-franked shares. That’s important because it is income-yielding assets that will support Australians in everyday living and in retirement.”

It’s important for investors to consider that not all private credit funds are the same, and that before investing they are satisfied that the fund manager has a stringent loan qualification process, excess protection for investors via mortgage security, adequate liquidity and is transparent with investors on the loan portfolio they manage within the private credit fund.

With returns in the range of 8% to 10% in the private credit market, private credit is offering ‘equity-like’ returns which is drawing investors into this growing asset class, according to Mr Keith. “We see the demand for private credit remaining high from both borrwers and investors. As the returns in private credit are driven by the demand for credit from borrowers as well as the premium to the RBA cash rate, we don’t see either of those two things changing in the near future. For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors yields significantly above the yields on rental properties which often fall below 5%,” Mr Keith said.

However, investors in private credit need to fully consider their liquidity needs and capital protection offered by the fund before investing in private credit. A key factor for investors is to ensure their fund manager invests their capital well and protects it through security over the loans, including mortgages over property and general security agreements over the business assets in which the fund invests.

———

Notes:
[1] https://www.rba.gov.au/speeches/2024/sp-gov-2024-08-16.html?&utm_source=rbanews&utm_medium=email&utm_campaign=speech-gov-2024&utm_content=house-of-reps-hearing-aug
[2] https://www.rba.gov.au/statistics/tables/xls/f04hist.xlsx?v=2024-08-16-11-56-40

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The ABS publishes a series of Selected Living Cost Indexes (LCIs)^[1], or inflation figures by household type. The Employee LCI rose 6.2% in the second quarter of 2024 from a year earlier, while the Pensioner and beneficiary LCI rose 4.1%. The Age pensioner LCI rose 3.7%, while the Self-funded retiree LCI rose 3.8% from a year earlier.

Employee households recorded the largest increase in living costs of all household types, as they are the most impacted by rising mortgage interest charges, the ABS said. A significant difference between the Living Cost Indexes and the CPI is that the Living Cost Indexes include mortgage interest costs rather than the cost of building new dwellings which is covered in the CPI.

According to Mr Keith, another interest rate rise is still on the cards after the Reserve Bank of Australia said this week that inflation is too high because demand is still too strong and inflation is expected to take longer to return to the central bank’s 2% to 3% target.

“With sticky inflation, Australians close to retirement should be devoting more of their investment portfolios to fixed income assets such as private credit to boost the real return on their assets, otherwise known as the return after inflation, which currently sits at 3.8%,” Mr Keith said.

“The rise in living costs could force investors out of cash into higher yielding assets. For savers, returns have improved dramatically given the rise in interest rates in the past two years, which will support investors in everyday living and in retirement. Private credit investments, or returns on corporate loans, have benefited from higher rates given rates on such loans are typically linked to official interest rates.

“So arguably retirees’ investment strategies and those of self-managed superannuation funds should consider diversification into private credit investments, which can deliver investors yields close to 10% per annum, well above the returns on bank term deposits or online savings accounts, which in June generally sat at less than 5% p.a.,^[3]” Mr Keith said.

“Investors’ capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” said Mr Keith.

“That is an important point. More defensive assets such as fixed income, and private credit particularly, may deliver more attractive yields than residential property, cash or fully-franked shares. That’s a key detail because it is income-yielding assets that will support Australians in everyday living and in retirement.”

Its important for investors to consider that not all private credit funds are the same, and that before investing they are satisfied that the fund manager has a stringent loan qualification process, excess protection for investors via mortgage security, adequate liquidity and is transparent with investors on the loan portfolio they manage within the private credit fund.

———

Notes:
[1] https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/jun-2024
[2] https://www.rba.gov.au/statistics/tables/xls/f04hist.xlsx?v=2024-08-07-08-51-35

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According to Mr Keith, a relatively high demand for capital from Australian businesses will also support returns from private credit. He sees private credit playing an important role in investors’ portfolios, delivering regular income to investors and strong returns after inflation.

“Depending on how the private credit fund is structured, investors are seeing returns in the 8% to 10% range across private credit. We see those returns being maintained and even potentially going a little higher if Reserve Bank does raise interest rates in coming months,” said Mr Keith.

“Australia is still in a reasonably high inflation rate environment. The June quarter CPI data this week shows headline inflation edged up to 3.8% from 3.6%. That consideration will be critical to the next RBA decision. We think that it is going to be a pretty close call. Even if the RBA does not rise, interest rates are likely to stay at current levels for the foreseeable future,” Mr Keith said.

That is likely to maintain the attraction of private credit, with the demand for capital high from businesses given the lending support from banks doesn’t meet the needs for credit of the economy.

Business credit (lending to non-financial businesses) grew by a healthy 7.8% over the year to June 30, 2024, compared to seasonally adjusted growth housing credit growth of 4.7%, data from the Reserve Bank of Australia (RBA) released this week reveal.  Personal credit, which includes credit card lending, grew by just 2.8%. “We see the demand for private credit remaining high. And as the returns in private credit are driven by that demand as well as the premium to the RBA cash rate, we don’t see either of those two things changing in the near future. For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors yields almost double the return and well above the yields on rental properties which often fall below 5%,” Mr Keith said.

However, investors in private credit need to fully consider fund their liquidity needs and capital protection before investing in any fund. A key factor for investors is to ensure their fund manager invests their capital well and protects it through security, whether that comes through mortgages or general security over the businesses in which the fund invests.

“Liquidity varies among private credit investments, so investors need to consider how much liquidity they need. They also need to consider how their capital protected; that a critical factor.”

According to Mr Keith, despite the high level of business credit, higher interest rates are having an impact on the business community along with meeting their tax obligations.

“We are seeing insolvencies rise to the highest levels we’ve seen for quite a period of time. A lot of this is driven by the ATO, and the ATO is making sure that all businesses pay the debts owing to them and following through with recovery action.

“Certainly, in the market that we operate in the SME business market, getting funding from banks is continuing to be difficult. And so we see the demand for credit quite strong from SMEs,” Mr Keith said.

“But for our business, the demand for business credit is primarily driven through how difficult it is to deal with the big banks. We deal with successful businesses that have great prospects going forward. They they’ve been in existence for quite a long period of time, being quite successful in what they do, yet they still find it challenging to get credit from the banks. That is the market that we play in, private credit, which is as strong as ever.”

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Research conducted by Performance Property for Capspace reveals expected price gains for housing, with building approvals in Australia not keeping up with demand in capital cities. Tim Keith, Managing Director of Capspace, said continued evidence of high construction costs and limited construction activity will mean the apartment and housing markets remain in an undersupplied position, especially in Australia’s two biggest cities, Sydney and Melbourne.

“Building approvals are simply not keeping up with population increases. The probability of valuation increases in the residential unit sector in Melbourne, Sydney and Brisbane are high over the next 24 months,” he said.

“Strong rental growth is still evident across the country for the residential housing and apartment sectors across most capital cities. The current national vacancy rate remains low at 2%. There is, however, evidence of rental growth starting to slow down in regional locations, which could provide some much needed relief to renters,” he said.

“With a growing accommodation shortage, this will put further pressure on rental markets nationally. Evidence of further increases to net interstate migration for Queensland and Western Australia are positive and that could also make an argument for investors to get more exposure to these capital cities for further diversification,” Mr Keith said.

Capspace uses property as security on loans that it offers customers, so it is important for the private lender to continually research and understand the property market. While property owners have benefited from price rises, investors should consider diversifying their portfolios into other assets, according to Mr Keith.

Australians have stockpiled their wealth in property; around two-thirds of household wealth is now held in residential property, a proportion that has increased over time with rising property values. That makes many Australians vulnerable to a correction in the property market over the longer term, especially if rates rise again, and the economy slows,” he said.

Recently released economic data, ABS Household wealth data^[1], shows household net wealth sat at a record $16.2 trillion in the March 2024 quarter, boosted by rising property prices and a record level of property assets, which totalled $11.0 trillion as at 31 March 2024.  As a proportion of net household wealth, residential property accounted for around 67.9%, up from 61.7% in December 2020. In contrast, households also held just $1.46 trillion directly in equities and $1.73 trillion in cash and deposits.

According to Mr Keith, Australians should be devoting more of their household wealth to fixed income assets such as private credit to diversity their investment risk and to reap more attractive income yields.

“Private credit can deliver investors yields close to 10% per annum and investors understand their capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” said Mr Keith.

The variable interest rate on the Capspace Private Debt Fund was 9.3% in July, well above prevailing interest rate on term deposits. The average advertised interest rate on three-year term deposits, for example, was just 3.95% in May 2024, unchanged from a year ago, according to the most recent data from the Reserve Bank.^[2]  The one-year rate was a little better at 4.55% and not much more than the official inflation rate of 3.6%.

———–

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New official data released today reveals that the value of new loans to investors for housing fell 1.3% in May to $10.7 billion but was still 29.5% higher than a year ago. The data from the Australian Bureau of Statistics (ABS) also shows the value of new loans to owner-occupiers (excluding first home buyers) fell 1.6% in May to $12.9 billion while first home buyer loans decreased the most, by 2.9% to $5.2 billion.

Notably, since May 2023, the value of new loans to investors has risen across most states and territories. The largest rises were in NSW (up 24.8%), Queensland (up 48.2%) and WA (up 73.9%). The value of new loans to investors in Queensland hit an all-time high of $2.4 billion in May, exceeding Victoria for the third straight month. The average loan size for investors in Queensland has risen 14.3% since May 2023 to $580,000 while the average loan size in Victoria has fallen 3.2% to $566,000, ABS said. NSW leads the nation with the largest loan size at $796,815.

“Investor demand for housing has eased in May due to higher interest rates, though strong growth over the past year has added to upward pressure on property prices,” said Mr Keith.

“Ongoing population growth will put further pressure on house prices and rents nationally in the coming year, keeping upward pressure on the size of household mortgages sizes, as well as inflation and potentially official interest rates,” he said.

Traders have priced a just-under even chance that the RBA will increase interest rates at its next meeting following stronger-than-forecasted inflation in May, according to Bloomberg.

“We believe that with the employment market remaining tight, and with no immediate signs of inflation falling below 3%, the RBA is likely to keep interest rates on hold at its August meeting and in the months to come or it could raise them again if inflation needs further taming,” Mr Keith said.

ABS data reveals that the key driver of household wealth gains in recent years has been rising property prices, which have outstripped growth in liabilities, as the chart below from the Reserve Bank show.

“With such a large proportion of individual wealth tied up in property, it makes sense for investors to diversify into other asset classes such as fixed income, to lessen the risk of their wealth falling should residential property prices pull back or interest rates rise,” said Mr Keith.

“While lower rates helped to boost asset values leading up to and after the Covid pandemic, higher interest rates could work to erode wealth in coming quarters should interest rates rise again this year. That indicates a positive outlook for the returns on private credit, as most corporate loans are floating rate and can increase with changes in the official cash rate,” he said.

According to Mr Keith, private credit offers an attractive level of regular stable cash income and return for investors, particularly in comparison to the long-run average returns of more volatile asset classes such as residential property.

“Over time, I expect individual investors to follow the lead of Australia’s largest superannuation funds and invest more in private credit investments, which do not attract a huge stamp duty impost or require a large initial deposit such as is required for residential property purchases.

“Private credit offers opportunities to younger investors as they can invest smaller amounts of money, unlike property investments which due to the high costs are beyond the reach of many Australians,” Mr Keith said.

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Household net wealth sat at a record $16.2 trillion in the March 2024 quarter, boosted by a record level of property assets of $11.0 trillion as at 31 March 2024.  As a proportion of net household wealth, residential property accounted for around 67.9%, up from 61.7% in December 2020.

Households also held $1.46 trillion directly in equities, $1.73 trillion in cash and deposits, and $3.88 trillion in superannuation.  The key driver of household wealth gains in recent years has been rising property prices.

“With such a large proportion of individual wealth tied up in property, it makes sense for investors to diversify into other asset classes, to lessen their risk of their wealth falling should residential property prices pull back on higher interest rates and any slowing in the economy,” Mr Keith said.

“While property owners have benefited from property price rises, more defensive assets such as fixed income, and particularly private credit, can deliver more attractive yields than residential property and even fully-franked shares. That’s important because it is income-yielding assets that will support Australians in everyday living and in retirement,” Mr Keith said.

“Private credit, or non-bank loans, for example, offer investors a relatively attractive income stream and capital protection through stringent loan process, along with the security taken over borrower assets. Private credit can deliver investors yields close to 10% per annum, which is almost double typical yields on residential property which fall below 5%.

“In addition, many private credit loans are floating rate and returns can increase with changes in the cash rate or bank bill swap rate.  With inflation remaining sticky, the RBA Governor, Michele Bullock, said the central bank board did discuss the case for increasing interest rates at its June meeting, which indicates a positive outlook for the returns on private credit, as most corporate loans are floating rate. In sum, any rise in official rates could lift returns on private credit.”

According to Mr Keith, private credit offers an attractive level of regular cash income and return for investors, particularly in comparison to the long-run average returns of more volatile asset classes such as residential property and share markets.

“That is one of the main reasons that Australia’s largest institutional investors are allocating more to private credit assets. AustralianSuper is one of the largest investors and has allocated over US$4.5 billion (A$7 billion) in private credit globally, with the stated ambition to triple its exposure in the coming years. Overtime, I expect retail investors to follow the lead of Australia’s largest superannuation funds given the attractions of this asset class, ” Mr Keith said.

———-

Notes:
[1] https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-finance-and-wealth/mar-2024#households

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