Articles

Real Estate Debt Investment in Australia: An Easy Guide

Written by

BigFundr Team

Published on

June 7, 2024

March 8, 2024

Looking to invest in Australia’s booming real estate market but lack funds to buy a property?

Seeking a more stable and predictable way to participate in the Australian property market?

With real estate debt investing, you can now do both! With investment sums as low as $1,000, almost everybody can get a slice of the Australian real estate debt investment pie.

This article provides an in-depth insight into real estate debt investment. It explores the opportunities available in the Australian real estate debt market, and outlines strategic steps for first-timers to prudently invest in Australian real estate debt.

What is Real Estate Debt Investing?

Real estate debt investing involves acting as a lender to property owners or developers, with the investment itself secured by the underlying property.

Real estate debt investment provides investors with fixed-rate returns, determined by prevailing interest rates and the amount of capital invested. These debt investments offer steady returns for low-risk investors looking for predictable income streams.

Also known as property-backed lending, investors in real estate debt enjoy a favourable position in the capital stack, typically situated at the bottom tier. This prioritisation gives you added security, as you will have precedence in receiving repayments in the event of financial distress or default.

If the borrower defaults, the lender has the authority to take possession of the property and liquidate it to settle the outstanding debt. Your investment is hence secured by the property, providing a protective measure for your capital.

While real estate-backed investments can provide a good stream of passive income, mitigating risk is paramount. This requires meticulous due diligence and comprehensive market analysis when selecting any property market.

By taking this proactive step, you can minimise potential risks and capitalise on specific opportunities within your chosen location's property landscape.

Why Invest in Australian Real Estate Debt?

With Australia's rapid population growth, acute residential supply shortfall, and strong economic indicators fueling demand, the real estate market is ripe for investment. Let us look at some of the compelling reasons driving real estate debt investing in Australia.

#1 Population Growth Driving Demand

Australia's population is expected to grow by 15% from 2023 to 2033, mainly due to net overseas immigration, creating a significant demand for residential properties. This growth rate outpaces many major economies and contributes to housing market demand that is likely to result in capital value growth despite rising interest rates.

#2 Residential Supply Shortfall

Australia’s residential market has one of the lowest vacancy rates at around 1%, indicating a tight supply of residential dwellings. Projections show a deficit of 240,000 residential units within the next five years, notably in Melbourne, Perth, and Sydney.

This shortage is expected to drive property value increases, with Melbourne projected to have the largest deficit, making it a lucrative real-estate investment area.

#3 Economic Growth and Employment

Predictions of job creation and wage growth, with employment numbers rising from 14.1 million in 2023 to 16.7 million by 2033 and average wages increasing significantly, suggest a strengthening economy.

The "triple boost" effect, comprising population growth, employment expansion, and rising average wages, is expected to further bolster real estate demand.

#4 Commercial Real Estate Opportunities

High office utilisation rates and CBD visitation recovering to near pre-Covid-19 levels indicate a robust demand for commercial office spaces, particularly in cities like Perth, Adelaide, and Sydney.

Sydney is poised to lead in rental growth rates, offering attractive opportunities in commercial real estate.

#5 Private Credit in Commercial Real Estate (CRE) Debt

With a substantial portion of commercial real estate debt due for refinancing in 2024, there is an opportunity for private credit institutions to engage in the CRE debt market. The market, valued at S$442 billion in 2023, is expected to see significant growth in private CRE debt, offering an attractive investment avenue. Taken together, these factors underscore the robust potential of Australian real estate investment, presenting a diverse range of opportunities across both the residential and commercial sectors. (Learn more about the opportunities of investing in Australian real estate debt in this article by The Edge Singapore.)

Steps to Investing in Real Estate Debt in Australia

Keen to start dipping your toes in the Australian real estate debt market? Follow these steps first.

#1 Master the Market

Getting ahead in the Australian real estate debt game is not about buying cool properties; it is about getting smart with things like debt notes, and economic trends. This involves understanding the interplay of factors like interest rates, property values, and regional trends.

Cities like Sydney, Melbourne, and Brisbane have historically shown strong demand for real estate, making them potential focal points for investment research. Additionally, exploring potential distressed properties in Australia, especially those facing high refinancing risks, could offer attractive opportunities for investors.

#2 Know Your Risk Appetite

Real estate debt investing, like any investment, carries inherent risks. Evaluate your comfort levels with these risks and consider your desired returns. Assess factors such as the stability of the real estate market, potential for default, and liquidity concerns.

For instance, while investing in senior debt (liabilities paid out first in claims) for prime commercial properties in central business districts may offer stable returns, it also involves higher initial investment and liquidity risks compared to investing in junior debt (lower priority for repayment and higher risk) for residential properties in suburban areas.

#3 Start Small

Beginning with lower investments helps you to familiarise yourself with the market and the process of investing. Starting small allows you to gain valuable experience in property-backed lending without exposing yourself to significant financial liabilities.

Consider investing in fractional ownership platforms to dip your toes into the market before committing to larger investments.

#4 Location Matters

Focus your investments on areas with strong growth potential and demand. Conduct thorough research on different regions within Australia, considering factors such as population growth, economic stability, and infrastructure development.

Targeting locations poised for growth increases the likelihood of favourable returns on your real estate debt investments. Explore Build-to-Rent (BTR) assets, providing development prospects in Australia, and contemplate acquiring premium office assets in key gateway cities as a strategic investment move.

#5 Align Financial Goals

Match your investment choices with your financial goals and objectives. Your investment strategy should align with your income needs, risk tolerance, and overall financial plan. Adjust your portfolio composition accordingly to achieve your desired balance of income and growth.

For example, if you are nearing retirement and prioritise income stability, allocating a portion of your portfolio to real estate debt investments with fixed-rate returns may be suitable.

#6 Find a Trusted Guide

Utilise experienced platforms or advisors to navigate your real estate debt investments. Seek out reputable platforms with a track record of success in connecting investors to quality opportunities.

Look for platforms or advisors with expertise in specific regions or property types that align with your investment objectives. If you are interested in commercial real estate debt, seek guidance from advisors with experience financing office buildings or retail centres in major urban hubs like Sydney or Melbourne.

BigFundr: Your Preferred Partner for Australian Real Estate Debt Investments

BigFundr introduces a safe and strategic way to invest in Australia's burgeoning property market through real estate-backed loan notes. Our carefully structured Deals allow you to enjoy unparalleled protection and fixed returns:

#1 Guaranteed Income

Being a subsidiary of public-listed Maxi-Cash¹, BigFundr assures that your capital and interest are legally guaranteed and protected, ensuring safety even in default scenarios.

#2 Real Estate Security

Every Deal is backed by tangible property assets, offering an added layer of investment protection. BigFundr has the first legal charge on the real estate, i.e. BigFundr and our clients will be the first to be paid from the sale of the real estate if the borrower goes into default.

#3 Cautious Lending

Our cautious approach includes capping loan-to-value ratios at 70%, minimising risk and safeguarding your investment.

#4 Fixed Returns

Enjoy the peace of mind of consistent monthly interest payments, making our offerings ideal for those seeking passive income or interested in compounding their investments.