For decades, brick-and-mortar property has been the bedrock of Australian investment portfolios and a proven strategy for long-term wealth creation. Yet, steep price growth, rising interest rates, and a tightening lending environment have seen this strategy come under strain.
At the same time, rising cost of living and policy uncertainty have further emphasised the risks of direct ownership, including significant upfront capital commitments, concentration risk, and the escalating cost of ownership.
For the past two decades, generous tax concessions encouraged continued investment. The approach was straightforward: borrow, hold, negatively gear, benefit from the CGT discount on the eventual sale.
However, the recent Budget announcement has disrupted each element of this tried-and-tested equation.
Proposed changes to CGT and negative gearing force investors to rethink their next move
Set to pass the Senate this month, the Labor Budget reforms represent the biggest shake up to direct property investment in years.
From July 1:
- Negative gearing will be restricted to new builds, outside of property-related expenses.
- While the 50% capital gains tax (CGT) discount will be replaced by inflation-adjusted indexation, with a minimum 30% tax rate, for existing properties.
While properties held before Budget night on 12 May 2026 are exempt, this tax overhaul has many Australian investors reconsidering their investment strategies and rethinking their exposure to property.
Yet, it would be a mistake to write off this asset class completely. The fundamentals of the Australian property market remain extremely attractive, with the investment case for Australian residential real estate stronger today than 12 months ago.
Current estimates suggest the country faces a shortage approaching one million homes, with capital cities under acute pressure due to record migration. This widespread structural imbalance continues to underpin demand.
The Federal Government has committed significant capital to addressing the housing supply deficit, with initiatives designed to bolster the new build pipeline.
At the same time, banks continue to pull back from construction and development lending, constrained by regulatory capital requirements and risk appetite.
The supply-demand gap has never been wider, creating significant opportunities for both private credit managers and investors. We anticipate demand for real estate will remain, but the investment approach may change significantly.
The rise of real estate private credit
Changes to CGT and negative gearing may dampen interest in direct ownership and brick-and-mortar investments, diverting capital to alternative real estate strategies, which offer diversified market exposure, stable income, and attractive risk-adjusted returns, while lowering concentration risk and upfront capital commitments.
Real estate private credit is one strategy capturing investor interest. The appeal lies in its ability to offer investors exposure to Australia's burgeoning property market in a way that focuses on stable income and capital preservation – qualities that are particularly attractive in today’s uncertain environment.
Alongside regular monthly income, real estate private credit also acts as a portfolio diversifier with returns typically tied to interest rates, not market volatility.
The Budget is accelerating a broader shift already underway. Investors are increasingly looking beyond capital appreciation and speculative growth towards strategies focused on capital preservation, income certainty, and defensive characteristics.
For experienced, specialist real estate private credit investment managers, the Budget may reveal new investment opportunities, drive greater deal flow, and embolden our investors, especially in a rising rate environment.
Is real estate private credit right for you?
For investors who know that a steady return of 9% today is worth more than a theoretical 14% tomorrow, real estate private credit may be worth consideration.
It offers predictability amidst a world of increasing uncertainty. Yet, it is not a homogeneous asset class.
To navigate the complexities, we believe it is best suited to sophisticated investors who have the experience and expertise to understand and assess both the risks and opportunities.
What investors should consider before allocating
Here are three things to keep in mind before allocating to real estate private credit.
1. The Capital Stack
In real estate private credit, the capital stack is broadly divided into three levels.
Senior debt offers the lowest risk profile – first to be repaid in the event of an asset sale, typically providing stable, risk-adjusted returns. This is Zagga's primary area of focus, given its strong capital preservation and downside protection characteristics.
Mezzanine debt carries a higher risk profile as it ranks behind senior debt in the repayment hierarchy, but generally generates a higher return to compensate for that additional risk.
Finally, equity sits at the bottom of the capital stack. While equity investors have the potential to benefit most from capital appreciation, they are the last to be repaid and therefore bear the greatest risk of loss should a project underperform.
Understanding where a private credit investment sits within the capital stack is critical to assessing both its risk profile and expected return.
2. Liquidity
A common misconception is that real estate private credit requires investors to ‘lock up’ their capital for extended periods. In reality, investment durations can vary greatly.
At Zagga, investment timeframes can range from three months to 24 months, or more. Investors can access the asset class either through a fund structure or by investing directly in individual transactions.
Funds can offer benefits such as diversification, risk mitigation, and, in some cases, enhanced liquidity.
Direct investments , on the other hand, provide investors with greater control over transaction selection and may offer the potential for higher returns, but typically require capital to be committed for the full loan term.
Understanding the trade-offs between liquidity, diversification, and control is an important consideration when determining which investment structure best aligns with your objectives.
3. Due Diligence
Opportunities in real estate private credit are vast and varied, and so are their risk profiles.
Before allocating to this asset class, investors must do their due diligence. This includes robust manager selection – understand experience, track record across market cycles, specialisation, and recovery processes.
Next, understand the specifics of your investment – the structure, assets, risks, and return.
Finally, understand how it fits within your investment portfolio. Real estate private credit should be part of a well-diversified, balanced portfolio.
Australian real estate private credit is no longer niche. Per recent report, Australia’s private credit market is currently valued at roughly $235 billion in assets under management (AUM), with almost 20% allocated to commercial real estate lending.
With direct, brick-and-mortar property investment no longer as attractive for some investors, we anticipate this figure is set to grow sharply.
The Budget has prompted many investors to review and rethink their investment strategies and search for alternative pathways to property.
Real estate private credit undoubtedly offers a lot of upside: stable income, portfolio diversification, and risk-adjusted returns. However, investors must also have their eyes wide open to risks.
When it comes to real estate private credit, the questions you don’t ask may be the ones that cost you.
Australia private credit market: EY-Parthenon Annual Australian Private Debt Market Overview
Image by Andrea Piacquadio on Pexels
