Is Your Portfolio Ready for 2026? A Financial Health Check for Australian Investors
A practical 2026 financial health check to help Australian investors review objectives, income, and portfolio positioning.
Real estate credit investing has been attracting more attention from Australian investors with significant listed equities exposure and who are seeking to augment their portfolio with alternative assets. Many are looking for regular income that exceeds RBA cash rate with the security of tangible asset backing – but like all investments there are risks involved and, as more non‑bank lenders enter the market, understanding the way each manager approaches risk is often more important than just focusing on headline ‘target returns'(which may never be realised if loans do not perform as expected).
Two managers could conceivably lend to the same borrower, on the same project in the same location, yet experience very different outcomes, with one achieving full recovery and the other facing a messy work-out. The difference between the two managers is most likely their approach to governance, credit assessment and risk management.
Investors place their trust in fund managers for them to be responsible custodians of their funds and manage risk on their behalf. Whilst you don’t want to spend your time second-guessing the manager, there are numerous factors investors can turn their mind to when selecting managers that will provide insight into how risk is managed. This is particularly important in real estate private credit where the risks are idiosyncratic (each borrower, location and project is a little different to the last) and the asset class is inherently illiquid.
| Credit governance | Does the manager have clear separation between the staff responsible for originating loans and those performing the credit assessment and decisioning? A hallmark of stronger credit governance is a separation of these roles so that originators (who are often incentivised by the volume of loans they write) are not also assessing the credit quality of the loans. Even better than a separation of roles is a credit committee with external members who can bring independent judgment and relevant industry experience to the table. Risk-mature managers will have the trifecta:- (i) clear policies, procedures and documented risk appetite, (ii) in-house credit and risk expertise separate from the origination team and (iii) an external credit committee. |
| Operating history and track record | Investors may also consider a manager’s length of operating history and whether any stated track record can be independently verified. A red flag may be a newly established credit manager with a short operating history, or one promoting an excellent track record but where the details can’t be readily verified. Most seasoned investors recognise that real estate moves in cycles. A manager who has only been operating for a couple of years may have limited experience in navigating downturn conditions or developing the ‘battle scars’ that can arise from riding the downturns, such as the dislocation that occurred during the global financial crisis in 2007 – 2009. You should also be able to understand (and believe) the numbers. Two key areas in particular warrant closer scrutiny: (i) Default rates. ASIC observed in their private credit report that some managers were reporting default rates of 2-6% in their portfolio – relatively low unless you have a very narrow definition of what constitutes a default. Institutional discipline sees managers unafraid of disclosing defaults or workout history. (ii) Internal Rates of Return. Most investors in this asset class are focused on income. Income can be simply expressed as a percentage per annum. Internal rates of return can depend on underlying assumptions and the timing of cash flows, so they need to be interrogated more closely. |
| Alignment of incentives | Incentives can influence behaviours (a.k.a. follow the money). When doing diligence on credit managers it is prudent to understand how the manager is getting paid as we have seen many different fee structures in the industry. For example, in some arrangements a manager may charge zero management fee, but instead receive 100% of the default interest on the loan…so they only get paid if the loan goes into default. It is fair that the manager is paid, but investors deserve full disclosure about where the money is flowing. Similarly, are there any conflicts – such as managers acting as brokers or developers on the side – and how those conflicts are identified and managed. Conflicts can influence credit discipline if not appropriately addressed. |
| Transparency and reporting | What gets measured gets managed. A manager should be measuring and able to articulate the detail of their portfolio and the robustness of the credit inputs that go into loan management and decisioning: – Regular arrears/default reporting. – Transparent valuation methodologies from reputable firms with no over-reliance on one valuer. – Portfolio construction metrics like geographic and security type diversification and portfolio LVR (especially for pooled funds). – Line of sight to the exit strategy on each loan. For managers who allow you to choose specific loans, like contributory mortgage funds, giving sufficient time to be able to make the investment decision is important. Whilst the syndicates may fill quickly, some managers will give you sufficient time to properly read the disclosure information provided and the ability to withdraw your commitment if you are unhappy. Vague reporting or inadequate disclosure can hide poor deal selection, inadequate due diligence and poor credit decisioning process. |
| The types of loans offered | Are you really investing in commercial real estate loans? Be aware that certain loans are regulated by the National Consumer Credit Protection Act 2009 (Cth). These are not genuine commercial real estate loans and ‘coded’ loans provide borrowers with substantial hardship protections. This makes it much harder for lenders to enforce on the security should it not perform. |
| Loan-to-valuation ratio | The loan-to-valuation ratio is the margin of safety between the property value and the loan amount. It is the ‘equity’ that the borrower has in the project ahead of the loan should conditions change. The maximum loan-to-valuation ratio an investor is comfortable with is a personal decision based on individual risk appetite. If a manager is consistently lending at high loan-to-valuation ratios then that may signal a lack of discipline in deal selection and credit assessment – especially if the targeted returns are not commensurate with the risk being taken. Investors should also consider how the manager is measuring loan-to-valuation ratio – is it on an “as is” basis (where the property is valued in its current state)? Or is it on an “as if complete” basis (where the property is valued as if the development has already been completed and the site fully improved)? |
Corval Avenue’s risk approach
Corval Avenue has been operating in Australian commercial real estate for more than two decades and combines real estate credit expertise with deep property experience. The team is acutely aware that we are managing idiosyncratic risk against a backdrop of an illiquid asset class, so we select, assess and structure each facility with the goal of protecting investors’ capital first. This starts with how potential loans are selected and continues through to how they are monitored over their life. We have an independent Head of Credit with extensive bank and non-bank experience and an external credit committee with decades of industry experience. Take a look at their profiles on our website.
Corval Avenue Limited ACN 089 265 270 AFSL 238546 (Corval Avenue) is the responsible entity of the Corval Avenue Select Credit Fund ARSN 090 994 326
This document does not contain and should not be taken as containing any financial product advice or financial product recommendations and has been prepared without considering your objectives, financial situation or needs. Before making any decision relating to a Corval Avenue fund, you should obtain and read a copy of the product disclosure statement and target market determination, or other relevant disclosure document for that fund, and consider the appropriateness of the fund to your objectives, financial situation and needs.
Past performance is not a reliable indicator of future performance.
Corval Avenue does not guarantee the accuracy, reliability, or completeness of the information in this document. To the fullest extent permitted by law, Corval Avenue, its group companies, and their directors, officers, employees, consultants, and agents disclaim all liability for any direct or indirect loss or damage arising from the use of this document. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed.
