Key Takeaways
- • Private credit yields quoted at 8–13% compare with roughly 5% from term deposits and government bonds, but questions are being raised after the Bathla collapse about whether SMSF investors are adequately compensated for the additional risk.
- • Corval Avenue CEO Laurence Hart argues that term deposits with government guarantees should not be compared directly with real estate private credit, which carries risk; many pooled real estate credit funds target 3% above the RBA cash rate net of fees, implying a current target return of 7.6%.
- • Corval Avenue cites recent contributory mortgage loans offered at investor rates of 8.1% and 8.8% net of fees, and says double-digit loan yields likely reflect borrower risk.
- • Advisers and SMSF trustees are urged to review manager longevity across property cycles, Regulatory Guide 45 reports published every six months, and Target Market Determinations for retail products.
- • The main liquidity lesson from Bathla is that liquidity mechanisms in illiquid real estate loan funds can fail under stress, requiring investors to hold liquid assets alongside private credit allocations.
Summary
Private credit has attracted significant SMSF inflows on the strength of yields of 8 to 13 per cent, compared with roughly 5 per cent from term deposits and government bonds. The collapse of Bathla has, however, raised questions about whether SMSF investors are being adequately compensated for the additional risk they assume. SMSF Adviser put these questions to Laurence Hart, CEO of Corval Avenue.
Hart argued that government-guaranteed term deposits should not be compared directly with bonds, listed fixed income or real estate private credit, all of which carry risk. He noted that many managers of pooled real estate credit funds target a return of 3 per cent above the RBA cash rate net of fees, implying a current target of 7.6 per cent. Corval Avenue runs a contributory mortgage scheme in which investors select individual loans, with pricing varying by security property, loan-to-valuation ratio and risk; the firm has recently offered loans at investor rates of 8.1 and 8.8 per cent net of fees. Hart said that double-digit loan yields should prompt investors to consider why a borrower is willing to pay that much, as the premium likely reflects risk.
ASIC has expressed concern that some private credit investments are marketed as stable income-producing assets when underlying exposures can include property development and construction lending. Hart recommended that advisers and trustees assess manager longevity, including whether managers have operated through multiple property cycles, and review Regulatory Guide 45 reports, which mortgage funds must publish on their websites every six months. For retail products, he advised close attention to the Target Market Determination.
On structure, Hart described contributory mortgage schemes as giving investors the ability to choose individual loans, with each loan effectively its own syndicate. Pooled funds offer built-in diversification under portfolio construction limits, such as caps on construction loans or single-state exposure, but less visibility over properties, borrowers and individual loan risk. On portfolio construction after Bathla, Hart said investors should compare disclosed concentration limits in the PDS with actual composition, including geographic spread down to postcode level, property-type mix and borrower concentration.
Hart identified liquidity as the central misconception. Platform inclusion, which provides access to adviser-led inflows, required liquidity mechanisms that proved imperfect when tested. Following Bathla, redemption requests rose and some funds had to manage or halt redemptions. Investors should understand that such mechanisms will be imperfect under market stress and should allocate accordingly, keeping liquid assets alongside illiquid private credit holdings.
Looking ahead, Hart said the real estate private credit segment has become crowded, leading some managers to take outsized risks and accept lower returns. He expects some participants to exit, creating opportunities for remaining lenders to improve pricing, lend at lower loan-to-valuation ratios and require stronger conditions such as more pre-sales or firmer project milestones. He expects the risk-return balance to shift back in investors' favour once the market adjusts.
Hart argued that government-guaranteed term deposits should not be compared directly with bonds, listed fixed income or real estate private credit, all of which carry risk. He noted that many managers of pooled real estate credit funds target a return of 3 per cent above the RBA cash rate net of fees, implying a current target of 7.6 per cent. Corval Avenue runs a contributory mortgage scheme in which investors select individual loans, with pricing varying by security property, loan-to-valuation ratio and risk; the firm has recently offered loans at investor rates of 8.1 and 8.8 per cent net of fees. Hart said that double-digit loan yields should prompt investors to consider why a borrower is willing to pay that much, as the premium likely reflects risk.
ASIC has expressed concern that some private credit investments are marketed as stable income-producing assets when underlying exposures can include property development and construction lending. Hart recommended that advisers and trustees assess manager longevity, including whether managers have operated through multiple property cycles, and review Regulatory Guide 45 reports, which mortgage funds must publish on their websites every six months. For retail products, he advised close attention to the Target Market Determination.
On structure, Hart described contributory mortgage schemes as giving investors the ability to choose individual loans, with each loan effectively its own syndicate. Pooled funds offer built-in diversification under portfolio construction limits, such as caps on construction loans or single-state exposure, but less visibility over properties, borrowers and individual loan risk. On portfolio construction after Bathla, Hart said investors should compare disclosed concentration limits in the PDS with actual composition, including geographic spread down to postcode level, property-type mix and borrower concentration.
Hart identified liquidity as the central misconception. Platform inclusion, which provides access to adviser-led inflows, required liquidity mechanisms that proved imperfect when tested. Following Bathla, redemption requests rose and some funds had to manage or halt redemptions. Investors should understand that such mechanisms will be imperfect under market stress and should allocate accordingly, keeping liquid assets alongside illiquid private credit holdings.
Looking ahead, Hart said the real estate private credit segment has become crowded, leading some managers to take outsized risks and accept lower returns. He expects some participants to exit, creating opportunities for remaining lenders to improve pricing, lend at lower loan-to-valuation ratios and require stronger conditions such as more pre-sales or firmer project milestones. He expects the risk-return balance to shift back in investors' favour once the market adjusts.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.