Debt Funds: Inside Track to Australian Investment for Overseas Capital

It’s a testament to Australia’s economic stability relative to other major economies that foreign lenders continue to seek to deploy capital into the Australian CRE market particularly in the “beds and sheds” space of the Build-to-Rent (BTR) and Logistics sectors.

According to Knight Frank’s just published Breaking the shackles: the rise of BTR report, if the total BTR stock reaches 55,000 units by 2030, it would still only constitute 1.5 percent of the overall rental supply in Australia, underscoring the significant potential for further expansion[2].

Other reasons for the increased interest in BTR are due to the shortage of rental properties in Australia and the fact that BTR has been very successful overseas.  However, this is yet to be fully tested in Australia and investors will be watching closely as the market develops further. For logistics, it is due to an increase in global trade activities, expansion of the e-commerce sector, evolution in information technology, freight and transportation.

The reasons for foreign lender interest are perhaps due to a shift stemming from differing perspectives. In a time of heightened volatility, Australian banks appear to have reduced advancing loans secured by CRE due to tighter credit requirements – lower loan-to-value ratios, and higher Interest Coverage Ratio (ICR) which is a challenge to most borrowers due to increased interest rates. 

To money managers in other parts of the globe, Australia’s CRE sector offers diversification opportunities and good risk-adjusted returns. Couple that with the security of Australia’s well-established common-law legal system, straight-forward regulatory framework and stable political environment, and it’s no surprise that foreign lenders are vying for access to these CRE markets. From our recent trips to Asia, Australian CRE seems to be seen as attractive compared with other countries on relative basis and foreign lenders are waiting on the sidelines to see evidence that the market has turned before investing. Foreign capital is there – ready to be deployed and it’s all about timing.

Examples of Foreign Investor interest in Australian CRE

On the equity side, foreign investors piled into construction starts within the BTR sector with approximately 70 percent of capital coming from foreign investors for the year to date 2023[3]. The industrial asset class is also attractive, and it has avoided negative returns unlike office, retail, hotel and healthcare sectors for the period March 2022 to June 2023[1].  Despite the total investment volumes dropping by 50 percent in the first six months of 2023 compared with the same period in 2022, Australia has still seen foreign investment in the CRE market with Japan accounting for the largest in-bound investors for the first half of 2023 with AUD 662 million; followed by North America at AUD 581 million, Hong Kong at AUD 557 million and Singapore at AUD 303 million[4].  There has also beenstrong investor interest in data centres as foreign investors look to diversify into alternative assets.

Debt Funds

Debt funds are a vehicle commonly used to pool foreign lenders money to invest in Australia. The debt fund could either enter into a bilateral loan or participate in a syndicated facility.

Setting up a debt fund requires collaboration with a trusted party that can act as trustee and security trustee on behalf of the foreign lenders, engage with, and manage, local service providers and provide on-the-ground infrastructure required to run the debt fund and its loans in Australia. The Security Trustee will take security over the trustee entity for the benefit of the foreign lenders.

Organisations that weigh the risks and rewards of CRE investment often find that debt gives them a preferable risk-adjusted return to equity placements. Debt occupies a preferred position in the capital stack, providing foreign lenders with an added degree of protection and a regular yield from the borrower’s interest payments.

Why Debt Funds?

Debt Funds provide a route to CRE investment and participants achieve diversification across a pool of assets rather than a single property. With the right stewardship and loan structures, fund sponsors can expect to find a receptive market.

Foreign lenders (including foreign banks, debt funds, non-banks and private equity) have become a vital resource for developers and property owners who are finding it increasingly difficult to satisfy their borrowing requirements through domestic banks. With their perceived greater flexibility, foreign lenders can structure arrangements that fit the needs of CRE borrowers. Rapid funding is a strong selling point, along with innovative solutions that range from customised loans to bespoke funding vehicles providing some or all of an applicant’s stretch senior, senior or mezzanine financing.  Foreign investors may also have a greater appetite for risk than regulated domestic banks making them attractive lenders against construction and transitional real estate.

How to Get Started with a Debt Fund

• Sponsors and investment managers of debt funds should seek to partner with trustees who are an extension of their team with tailored, integrated, faultless, robust processes and systems, security and data protection; and the ability to manage bespoke transactions. Having a knowledgeable trustee with the required Australian Financial Services Licence is vital for these transactions.
• To meet regulatory requirements and maximise potential returns on Australian debt investments, foreign lenders require a regulatory lawyer, structuring lawyer and tax adviser that can ensure the trust structure meets all requirements.
• As an experienced and regulated financial services firm rooted in CRE, Trimont is well positioned to assist organisations with investing in the Australian CRE arena through these private debt structures.
• The team at Trimont is already serving as a debt fund trustee for many clients. Not only can we set up a client’s debt fund, but we can also provide all the underlying services necessary to manage the debt fund’s loans serving as facility agent, trustee, security trustee and credit portfolio manager.

To learn more about how Trimont can assist you with investing in Australian CRE through private debt structures, syndicated loans or bilateral loans, contact Esther Ang, Managing Director – APAC, Trimont at eang@trimont.com.

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[1] MSCI Real Assets Market Briefing

[2] Knight Frank’s Breaking the Shackles – the rise of BTR report https://www.propertycouncil.com.au/property-australia/build-to-rent-sector-is-set-to-break-off-the-shackles

[3] MSCI Real Assets Market Briefing, 17 August 2023

[4] World Property Journal 11 July 2023 (World Property Journal)