Australia’s housing shortage remains acute but the levers being pulled will support commercial real estate private credit growth for years.

As you are probably aware, Australia has a housing problem. Too many people and not enough homes to house them all.

The federal Labor government has a lofty target of building 1.2 million new homes by 2029, but many believe that still won’t be enough given our population growth, which has been driven by record levels of migrant intake.

According to Metrics Credit Partners Managing Partner, Andrew Lockhart, the housing shortage remains “acute, with net migration remaining near record highs and housing commencements near record lows.”

But he also adds that immigration is not the only factor behind the shortage.

“We also see continuing delays in project planning outcomes delaying development projects and a further impact on the supply response as future development projects that face higher construction costs, tight labour markets, increased holding and finance costs, and government charges impact the financial feasibility of projects without a price response”.

Meanwhile, economic growth and e-commerce growth continue to support demand for industrial logistics warehouses, which in turn support metropolitan industrial property markets.

Whilst the housing crisis won’t likely be solved anytime soon, steps are being taken in the right direction. State and local governments across Australia are enacting measures to stimulate supply, which Lockhart says will ultimately be good news for the suppliers of credit.

The Metrics approach

Metrics’ real estate exposures are predominantly short-term residential and industrial project funding in growing metropolitan precincts across Australia.

“We focus on these two sectors in commercial real estate (CRE) lending because they are underpinned by strong long-term structural fundamentals,” says Lockhart.

He adds that Metrics continues to see steady growth in the demand for non-bank debt finance since it became involved in that space more than 11 years ago.

“We have maintained a consistent investment approach to capture this market opportunity, leveraging our size and scale, direct origination, strong underwriting and portfolio risk management skills”.

“We invest in sectors that demonstrate stability through economic cycles, and not where specific cyclical movements are required to support an investment case”, says Lockhart.

What if immigration slows?

Even if immigration slows, as it is widely expected to, Lockhart notes that Australia’s housing shortage will be underpinned by our growing urban population, and this is only partly driven by immigration.

“The housing shortage is a long-term trend that is also driven by other factors that we do not expect to be resolved in the medium term. These include lack of supply, construction costs and domestic population growth,” says Lockhart.

This continued demand is a big reason for why Metrics has just launched a new fund – The Metrics Real Estate Multi-Strategy Fund (1) (Fund). The fund provides an opportunity for investors to obtain broad exposure to CRE investments. The Target Total Return is 10-12% p.a. (net of management fees and expenses) through the economic cycle.(2)

According to Lockhart, the investment objective(3) of the fund is to provide investors with exposure to a diversified portfolio of private markets CRE investments covering the entire capital structure. The assets range from lower-risk senior secured first registered mortgage debt investments to equity investments which have bigger risks but also offer potentially higher returns. All this is done to deliver to investors the Target Total Return.

The Fund seeks to provide investors with monthly cash income, preserve investor capital and manage investment risks, whilst providing potential for higher total returns.

A diversified portfolio

50% of the Fund’s capital is invested in CRE debt investments and 50% in equity investments in CRE development projects and investments.

According to Lockhart, these proportions may change from time to time depending on how Metrics believes the investment objective of the Fund can be best achieved.

“To achieve this, the Fund will gain immediate access to an existing diversified portfolio of private market CRE debt and equity investments via the Fund’s investments in the MCP Real Estate Debt Fund and the Metrics Real Estate Equity Opportunities Fund, two Wholesale Funds managed by Metrics”, says Lockhart.

“In addition to investing in the Wholesale Funds, the Fund may make direct investments”.

Security vs return

“The Fund seeks to invest in a portfolio that best achieves the target return while minimising the associated investment risks”, notes Lockhart.

“Metrics has strong capabilities and experience assessing risk and evaluating opportunities to maximise risk-adjusted returns, whether through debt or equity investments”.

The Fund aims to balance its objectives by allocating across CRE debt, which seeks higher stability and income, and CRE equity investments, which seek to deliver higher total returns.

Origination and access

According to Lockhart, CRE investments undertaken by Metrics are originated through direct relationships with property companies.“We are able to develop these relationships due to our size, scale, industry reputation and track record in CRE transaction execution”, says Lockhart.

He is keen to point out that Metrics has experience negotiating, structuring and assessing transaction risk to determine the risk/return profile for investment opportunities. Metrics also has significant experience in portfolio risk management, which aims to help protect investor capital even if an opportunity deviates from expected performance.

Outside of the banks, Metrics has one of the largest direct loan origination networks in the Australian market.

“Our relationships, size and scale give us access to a significant pipeline of opportunities, allowing us to choose the loans we prefer from a larger (quality) pool”, says Lockhart.

“We use sophisticated risk management tools and apply a strong risk management framework. Our experience across transaction structuring and execution, risk assessment, portfolio monitoring, corporate restructuring, and distressed workouts is demonstrated by the track record of all our funds”.(4)

Accessing the opportunity in private credit

For investors looking to access the private credit and CRE market, Metrics offers several options.

In addition to the Metrics Real Estate Multi-Strategy Fund (ASX: MRE), Metrics offers the Metrics Master Income Trust (ASX: MXT) and the Metrics Income Opportunities Trust (ASX: MOT), as well as a range of unlisted funds tailored to various risk/return profiles and liquidity preferences.

These options are accessible through private wealth platforms and direct investment avenues, making Metrics a robust partner for investors navigating today’s private credit landscape.