The Australian real estate first mortgage market has undergone a significant transformation over the last 12 months, pivoting from a period of monetary tightening and credit constraint to one of easing and renewed confidence. This shift has been driven by a series of RBA cash rate cuts and a broader market recalibration that has seen the re-entry of traditional banks, intensifying competition for private lenders. Concurrently, a substantial weight of new capital, both local and international, has been attracted to the market, seeking stability and yield.

A critical implication of this transitional phase is the increased importance of valuation. While the broader residential market shows signs of momentum, key sub-markets, such as B-grade commercial office and high-density residential developments, are experiencing significant valuation headwinds due to persistent structural changes and historical oversupply. This bifurcation highlights a fundamental market reality: not all real estate is recovering equally.

This environment validates a highly targeted lending strategy. A focus on development-light projects, including land bank, residual stock, and residential bridge loans, particularly for facilities under $20 million. This niche is characterised by less intense competition from well-capitalised institutional lenders and offers the potential for attractive risk-adjusted returns, provided a rigorous valuation discipline is maintained to mitigate exposure to volatile sub-markets.

The New Rate Environment

Over the past 12 months, a more dovish RBA stance has lowered the cash rate, providing a base for lower borrowing costs. This, combined with a flood of new capital into the sector, has led to significant yield compression, making the lending environment highly competitive.

The Resurgence of Banks and the Private Credit Response

Australia's real estate lending landscape has seen a fundamental shift over the past 12 months with the re-entry of traditional banks. Banks, having previously scaled back their lending due to capital constraints and regulatory pressures, are now aggressively competing in the market. The increased bank participation has intensified competition, particularly in core commercial real estate lending and construction financing.  

This dynamic has created a two-speed system. On one hand, the highly competitive, bank-led segment is characterised by a focus on high-volume, standardised, and lower-risk lending. On the other, the specialised private credit sector is being challenged to find its niche. In response, many private lenders are pivoting to areas where they hold a competitive advantage: faster turnaround times, more flexible structuring, and a willingness to fund projects that do not fit a bank's rigid credit model, such as development-light projects and bridging finance.

How to Identify an Underserved Market

An underserved market is one where the demand for capital exceeds the supply. Segments where traditional banks are reluctant to lend due to stricter regulations, risk aversion, or operational constraints. These are often projects that are considered too small, too complex, or too risky for a bank's credit model. Investors can identify these segments by looking for specific market inefficiencies and data points.

• Review bank lending data: If local banks are pulling back from a specific asset class or geographic area, it's often a signal that private lenders can step in.

• Monitor project-size limits: Lenders typically have minimum loan sizes to justify their internal costs and regulatory requirements. A project below this threshold, may be a candidate for private credit.

• Engage with brokers and intermediaries: Mortgage and commercial brokers often have a pulse on where traditional lenders are saying "no." This network can provide real-time intelligence on market gaps.

In the last 12 months, iPartners has maintained a targeted focus on segments we believe are underserved, where we can achieve outsized returns for our investors:

1. Development-Light Projects: Banks typically prefer to finance large-scale, pre-sold residential developments. They are less interested in smaller, development-light projects that don't fit their standard volume requirements.

   • Residual Stock Facilities: Loans for the final units of a completed development. This is a common niche as the loan size is often too small for a bank.

   • Land Bank and Vacant Land Loans: Financing land with development approval but no immediate construction. Banks often view this as a higher risk and prefer to lend on properties with existing cash flow or firm construction plans.

     
     

2.        Bridging Finance: This is a classic underserved market. Bridging loans are short-term loans used to "bridge" the gap between buying a new property and selling an existing one. The speed required for these transactions makes them difficult for banks to process, providing a perfect opportunity for agile private lenders.

With competition and yield compression increasing in Australia's real estate lending market, private credit investors may target underserved segments to find value. Focusing on niches like development-light projects or specialised assets allows for higher yields and greater control over loan terms. This strategic approach can deliver enhanced portfolio diversification, helping investors build a competitive advantage beyond just price, and securing strong, risk-adjusted returns in a changing market.