Property investment exec highlights the differences
The decision between investing in private credit and direct property hinges on several factors, each catering to different investment strategies and risk tolerances. Here, Andrew Thomson (pictured above), general manager of property investment service CFMG Capital, enumerates the differences between the two options.
Direct property investment, Thomson explained, involves purchasing real estate with a combination of equity and debt, typically from a bank. Investors earn rental income, which is used to cover loan repayments and various property-related expenses.
The potential for capital gains or losses upon selling the property adds another dimension to this investment type. Negative gearing can offer tax benefits if the property incurs more costs than it generates in rental income.
Private credit, on the other hand, involves lending to third parties, often for property development projects.
“For many investors, products like our CFMG Capital Monthly Income Fund (MIF) have become an attractive alternative to investing directly in property,” Thomson said.
He explained that the MIF focuses on loans secured by first mortgages on real estate, providing investors with priority claims in case of defaults. Investors receive interest income from these loans, offering a different risk and return profile compared to direct property investment.
According to Thomson, Australian residential property has shown long-term growth of around 6% annually, with variations between 4% and 9% depending on the market conditions.
The returns comprise rental yields and capital appreciation, influenced by factors such as location, property condition, and market demand.
“One of the key benefits of private credit returns is the returns on offer,” Thomson said. “The nature of the lending and the associated risks mean borrowers are often willing to pay higher interest rates.”
For example, CFMG Capital’s MIF targets a return of 8.25% per annum, though this can fluctuate based on loan performance and market conditions. This predictable income stream can be appealing to investors seeking regular returns.
Meanwhile, investing in property typically requires a long-term commitment, with the process of selling a property often taking 60 to 90 days, Thomson pointed out. This illiquidity can pose challenges for investors needing quick access to cash, particularly if the property is tenanted under a long-term lease.
“Private credit is generally a much more liquid investment,” Thomson said, adding that CFMG Capital’s MIF, for instance, allows investors to request withdrawals after a 12-month period, with funds typically accessible within about 27 business days. This flexibility, he stressed, can be advantageous for those requiring more dynamic access to their capital.
Also, managing a property investment involves various costs, including borrowing expenses, maintenance, property management fees, and insurance. Investors also bear the responsibility of overseeing these elements, which can be time-consuming and complex.
In private credit, management fees are paid to the fund manager, simplifying the investment process for investors. CFMG Capital’s MIF charges a management fee of 1.1% per annum, plus additional administrative costs and structuring fees. This approach can be attractive to investors preferring a more hands-off investment.
Interest rate fluctuations can also significantly impact property investments, particularly those that are heavily leveraged, according to Thomson.
“For a direct property investment, the investor will have to make higher repayments as interest rates go up,” he said. “They may be able to cover some of this increase by increasing the rent. If rates go down, they will get the benefit of lower repayments.”
Interest rates also affect private credit, where competitive pressures may force down targeted returns when rates fall. This can influence investor expectations, and the overall attractiveness of the investment compared to other available options.
Key risks in property investment include interest rate volatility, changes in tax laws, and tenant-related issues such as vacancies and property damage. Market downturns can also impact property values, affecting potential capital gains.
Private credit risks include borrower defaults, which are mitigated by securing loans with first mortgages, as well as market and liquidity risks. Detailed risk assessments and stringent lending criteria are crucial in managing these risks effectively.
“As you can see, each type of investment has pros and cons, and it is important to consider which is best for your investment goals,” Thomson said.
Which investment type suits your portfolio best? Tell us in the comments section below.
