The Rise of a New Asset Class - Private Credit : Understanding Private Credit in the Asia Pacific Property Market (2025)

Introduction

• Objective: Provide a comprehensive overview of private credit as a financing mechanism in the Asia Pacific property market, highlighting its relevance in the current economic climate 2025.

  
  

• Current Context:

  • Global interest rates stabilizing after recent hikes, with Asia Pacific

economies showing mixed recovery signals.

• Property market challenges: Oversupply in some urban centers (e.g., China), demand shifts due to remote work trends, and regulatory tightening in key markets like Hong Kong and Singapore.

• Growing appeal of private credit due to traditional bank lending constraints and the need for flexible capital solutions.

• Relevance: Private credit offers an alternative to public debt and equity markets, especially for middle-market property deals, as demonstrated by successful fund structure types.

Section 1: What is Private Credit?

• Definition: Privately negotiated loans or debt instruments provided by non- bank lenders (e.g., private equity firms, credit funds) to property developers, investors, or operators.

• Key Characteristics:

  • Higher yields (e.g., target ranges of 12-14% net annual return for certain fund structure types).

• Flexible terms compared to traditional bank loans.o Focus on senior secured debt, mezzanine debt, or opportunistic

investments.

• Advantages in Property Market:

  • Quick deployment of capital for time-sensitive projects.

  • Tailored solutions for distressed or niche property assets.

• Risks:

  • Illiquidity and higher default risk in volatile markets.o Dependence on economic stability and interest rate trends.

Section 2: The Asia Pacific Property Market Landscape (2025)

• Market Overview:

  • Diverse regional dynamics: Growth in Southeast Asia (e.g., Vietnam, Indonesia) contrasts with slowdowns in China and Hong Kong.

  • Rising demand for industrial and logistics properties due to e-commerce growth.

  • Residential sector facing affordability issues and regulatory curbs (e.g., cooling measures in Singapore).

• Economic Factors:

  • Inflation pressures easing but still impacting construction costs.

  • Central bank policies (e.g., Hong Kong Monetary Authority) influencing borrowing costs.

  • Geopolitical tensions affecting cross-border investments.

• Opportunities for Private Credit:

  • Financing for mid-sized developers unable to access public markets.

  • Refinancing distressed assets in oversupplied markets like China.

    
    

Section 3: Private Credit Strategies in Asia Pacific Property

• Senior Secured Debt:

  • Focus on first-lien loans with priority repayment (e.g., investments with coupons around 14.1%).

  • Low loan-to-value ratios (e.g., approximately 37%) to mitigate risk.

• Mezzanine Debt and Opportunistic Investments:

• Higher risk/reward plays (e.g., 20-30% portfolio allocation to mezzanine and secondary markets).

• Examples: Mezzanine investments yielding around 14%.

• Offshore Vehicles:

• Tax advantages for non-US investors (e.g., target net IRR of 21.2% after tax withholding).

• Relevance for Hong Kong-based investors under current tax structures.

• Sector Focus:

• Defensive sectors with growth trends (e.g., Government & Infrastructure Services at 10% of some portfolios).

• Alignment with private equity partnerships for deal sourcing.

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Section 4: Case Study – Approach of a Fund Structure Type to Asia Pacific

• Fund Background:

  • A fund structure type with over $350M in commitments, targeting a final close in the first half of 2025, including an offshore vehicle for international investors.

  • Historical performance: Net unlevered IRR exceeding 26% since 2017, surpassing North America private credit averages.

• Investment Metrics:

  • Average issuer revenue: Approximately $363M, EBITDA: $70M, cashyield: 10.4%.

  • Early repayment average of 2.3 years, indicating liquidity potential.

• Application to Asia Pacific:

  • Potential to replicate success in markets like Singapore or Australia with similar middle-market dynamics.

  • Leveraging a substantial deal-sourcing network to identify undervalued property assets.

Section 5: Practical Steps for Engaging with Private Credit

• Step 1: Market Research:

  • Identify high-growth sub-sectors (e.g., logistics in Southeast Asia) and assess regulatory risks.

• Step 2: Partner Selection:

  • Collaborate with experienced fund structure types, focusing on teams with 20+ years of credit expertise.

• Step 3: Due Diligence:

  • Evaluate loan terms, LTV ratios, and sponsor quality (e.g., significant advisory board representation).

• Step 4: Structuring Investments:

  • Consider offshore vehicles for tax efficiency, especially for Hong Kong investors.

  • Negotiate preferred returns (e.g., 8% hurdle rate) and carried interest terms.

• Step 5: Monitoring and Exit:

  • Track portfolio performance (e.g., 5.5-year average loan tenor) and plan for early repayments.

Section 6: Current Challenges and Mitigation Strategies

• Challenges:

  • Rising interest rates impacting debt servicing.

  • Regulatory hurdles in key markets (e.g., China’s property debt crackdown).

  • Currency fluctuations affecting cross-border deals.

• Mitigation:

  • Focus on floating-rate loans to benefit from rate increases.o Diversify across geographies and sectors (e.g., investments in 70+ companies).

  • Utilize strong PE partnerships for risk assessment.

Section 7: Future Outlook for Private Credit in Asia Pacific

• Trends to Watch:

  • Increased demand for sustainable property financing (e.g., green buildings).o Growth in secondary market opportunities as traditional lenders retreat.

• Projections:

  • Private credit AUM in Asia Pacific expected to grow as fund structure types expand regionally.

  • Potential for 10-13% annualized returns, aligning with historical performance trends.

• Opportunities for Investors:

  • Entry into emerging markets like India and Vietnam with tailored credit solutions.

Conclusion

• Summary: Private credit offers a robust alternative for financing property deals in the Asia Pacific, especially in the current economic environment, with fund structure types demonstrating proven strategies and returns.

• Call to Action: Encourage participants to explore private credit opportunities, conduct thorough due diligence, and consider consulting with experienced fund managers for tailored investments.

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