If interested in private credit (Sydney) - This AFR article is worth a read

If you are thinking about investing in private credit, this article is worth a read:

https://www.afr.com/property/residential/metrics-unsold-mega-site-shapes-up-as-major-test-for-private-credit-20260907-p60v1e?utm_source=afr-web&utm_medium=share_article&utm_campaign=property&utm_content=afralldigital&utm_term=product_feature

This is a summary. There is a mega site (16.7ha... can support over 3600 apartments) near Olympic Park in Lidcombe in Sydney. Metrics (a private credit fund with $40bn in AUM) seized control of the site after the developer failed. It was owed $270M. What was interesting was the site was originally acquired for $660M in 2016. To quote from AFR: " Australia YMCI, a developer owned primarily by the provincial government of Yunnan in China, bought the mega site from Goodman for $660 million in 2016. It had ambitions to build a 3000-apartment precinct, but completed only 421, which have been plagued by quality issues."

This is the punch line. Again quoting the article: " KordaMentha partner David Osborne has been appointed liquidator of Australia YMCI, the developer of Carter Place, and is overseeing the sale on behalf of Metrics. He has fielded offers above $200 million, placing those bids well below the value of the facility extended by the private credit firm."

I was at this exhibition earlier this year. There were several private credit funds pitching their funds. Many of them lend to property developers and offer return of 8-12%. The pitches were invariably the same. Due diligence on each project. Low loan to value. Have priority in claim etc etc.

As investor, if I can get around 10% return and almost "NO" risk (after talking to the sales folks), I would say private credit is certainly attractive.

BUT this is my beef. Private credit funds, by definition, extend loans to folks which the banks prefer not to deal with. Of course, there are risks. Now consider the profile of such developers in the news these days - YMCI (in this article) and Bathla. Wonder why the banks chose not to deal with them ?

Private credit funds have worked in recent years (or folks would not be pouring money into these funds). However, folks were just betting on the rising tide in the ever rising property market in Australia. We have not had a property market downturn for years.

Maybe now we will see how good is the credit quality of these private credit funds ? So far, we have 2 problematic borrowers hitting the news. Would there be more ?

Turning back to the article.... My take away is low loan to value is not 100% fool proof. Valuation of illiquid assets can be rubbery. Anything over risk free rate means you are taking on risk. There is no free lunch in the world.

What to do if one is interested in private credit ? Know as much as you can about the underlying assets (which may well impossible). Look to see if the fund is concentrated in one borrower/asset class/location etc etc.... The next step is DIVERSIFICATION. Spread it out with multiple funds across multiple sectors would be wise.

One more point... Given the current political wind ( Labor and One Nation leading the poll), it is hard to feel confident about the economic outlook of Australia. More important than ever to consider return OF capital over return ON capital.