Private credit set to surge as cooling inflation frees up borrower appetite

The rise of private credit as an independent asset class, rather than a niche alternative sleeve, is set to continue as a confluence of factors align to facilitate more lending, especially in the commercial real estate sector.

With inflation well off boiling point in the US and growing evidence that its cooling will be sustained and it is safe to lower interest rates, most developed nations are preparing to do that same. Australia won’t be anywhere near the first wave of interest rate cutters, and is more likely to feature towards the end of that trend tail, but the effect of a softening global market isn’t far away for the domestic economy.

For private credit providers, that means a better environment for borrowers and the prospect of more deals being done according to Craig Bannister, executive director of distribution at commercial real estate debt providers Pallas Capital.

Global interest rates are starting to “roll over”, Bannister said at The Inside Network’s recent Income and Defensive Symposium in Sydney, and rate cuts are starting to come in. Australia “isn’t there yet,” he explained, with the inflationary bubble expanding a little further on our shores. Assuming they do come through in the US during the back half of the as predicted, however, the signal that sends should take a bit of breathing room for borrowers.

And that is good news for a non-bank lending cohort that have proven over the last few years that they can provide viable, well structured loans to borrowers and stable, above benchmark returns to investors.

“Inflationary pressures are obviously coming off,” Bannister said. “So the next two-year, three-year period is looking good for us as lenders, compared to where we were in 2022 with with rates increasing.”

That challenging period in 2022, when interest rates were climbing, carried over into 2023, when they peaked. Private credit providers like Pallas were still getting deals done by providing loans to clients that either couldn’t go through the banking system, didn’t have the time to wait for approvals or preferred the flexibility of non-bank credit, despite the cramped conditions. Pallas was still lending at a sustainable rate through the period – the manager has amassed four and a half billion dollars worth of lending via almost 700 transactions – but the high inflationary environment in 2023 was not ideal.

As inflation reaches its tipping point, however, things look different.

“From a credit and loan management perspective, we’ve been through certainly a tough 2022, 2023,” Bannister said. “We’re moderating now. These projects are coming back up for funding.”

The two primary inputs into the residential private credit sector – end values are and construction costs – are “holding and stabilizing”, he said, which bodes well for the future.

“As a lender we’ll look at feasibility studies, and if they stack up… we’re going to be doing a lot more construction, development and finance.”