Navigating the Ascendance of Non-Bank Lending: A Strategic Insight by Aura Property Credit

Interest Rates: Higher (For Not Much) Longer

The rise in interest rates in Australia over the past 18 months has resulted in banks scaling back on higher-risk lending.

Alternative lenders like Aura Property Credit and peer-to-peer lending platforms have emerged to fill this gap in the market, providing borrowers with a range of financing options that address their needs. These alternative funding solutions often offer  flexible terms, and streamlined application processes, making them an attractive option for borrowers who need a more flexible solution than the mainstream banks can provide.

According to Reuters, non-bank lending has been growing, reaching more than A$600 billion1 in assets in 2022 (including lenders focused on retail credit). The consensus view is that the cash rate has reached its peak with the big 4 banks forecasting falling rates as soon as 2024., so this upward trend in growth is likely to continue. These circumstances have the potential to reward property credit investors. While the decrease of the cash rate does not generally affect the investor returns, the softening of RBA monetary policy is typically accompanied by an increase in property prices as a result of elevated accessibility of mortgages, which in turn improves the position of property-backed lenders.

Commercial Property: On the High Rise

Commercial property in Australia is commonly perceived as riskier and less liquid compared to residential property due to a smaller pool of potential buyers. Tightening of RBA monetary policy correlates with a contraction in business activity, negatively affecting rental income from commercial properties. Lenders consider this a key factor. Conversely, as monetary policy stabilises, rental income and tenancy levels are expected to rise, augmenting the appeal of commercial property for lenders and investors.

Now May be the Time for Property-Backed Lending

Market conditions continue to favour property credit as mainstream bank clients are increasingly turning to alternative funding solutions for their projects for several reasons. 

• The going concern of raising interest rates makes borrowing from mainstream banks less attractive as the cost of borrowing increases.
• Many borrowers are unable to meet the stringent lending criteria and requirements set by mainstream banks, which can include high credit scores, large down payments, and substantial collateral.
• Borrowers are seeking alternative funding solutions that offer more flexibility, customized terms, and faster approval processes

With interest rates set to fall and the property market set to remain buoyant in 2024, now may be the time to invest in property-backed lending.