Company Interview / A $1B deal to address Australia's housing crunch

Key points:

Drew Bowie discusses Australia's housing supply crunch and government efforts.$1 billion deal with Warburg Pincus aims to address supply imbalance.Private credit market continues to grow with strong investor demand.

Drew Bowie of MA Financial (ASX: MAF) addresses the complexities of Australia's housing supply crunch, attributing it to increased regulations that extend project timelines and costs. Drew believes that while government's efforts to improve processes and ensure quality outcomes are valuable, they have inadvertently created inefficiencies.

Drew views the recent $1 billion deal with Warburg Pincus as timely, citing resilient returns in senior secured asset-backed lending despite significant cost increases. He highlights strong demand and believes that easing costs could spur institutional capital into senior secured development funding for residential markets.

Discussing private credit growth, Drew forecasts substantial expansion, driven by investor demand for transparent and well-governed portfolios. He sees continued interest in private credit, with impressive returns compared to equity investments. Drew notes that government support and coordination between state and federal levels are crucial to address the housing shortage and planning challenges.

Full unedited transcript below:

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Let's get now into some company news. Ma financial announcing the establishment of a real estate credit vehicle. But before we get to that, I want to ask Drew Bowie, MD of Ma financial more broadly about, um, the housing supply crunch, I guess. Great to have you with us, drew. What are you seeing in terms of that and how it could, in fact, be rectified? Well, it's a very complex issue. Uh, I think there is a deep willingness of governments to address the issue. They've identified that it exists. That's a that's a good starting point. Um, but it is complex. I think there is some low hanging fruit, uh, that, that governments should focus on. And that's really around efficiencies. What we're seeing is a lot of increased regulation to improve quality outcomes, which is a good thing. But those processes have identified inefficiencies. And so delivering projects is taking a lot longer. That has a huge cost impact that flows on to the consumer as well. So why do you think now is a good time then to

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have this deal that you've announced with Warburg Pincus. Well, there's clearly a significant supply demand imbalance. We think that the senior secured asset backed lending has proven very resilient in the last couple of years, which have been really tough couple of years. We think about the level of cost increases that we've had 21 through to 23. We haven't seen such significant cost increases in 50 years. The oil crisis of 1974. So that is the extent of the issue that we've had. But we've seen very little defaults or losses within the senior secured credit landscape. So that's proven itself. Uh, and so we'll see tremendous demand, a willingness of governments to enable greater planning, greater supply outcomes. So a lot of demand. What are the risks though to investors. Well, there's I think there's greater levels of risk as you go up the capital stack. There's all forms of private credit. We certainly focused on senior

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secured asset backed lending. But we. We believe there are challenges further up the capital stack in pref equity, in mezzanine debt financing, second ranking security. So at that senior secured level where you can can control the outcomes, uh, we're seeing great returns for risk. How much further do you think private credits are going to continue to grow? Because it's quite an astounding pace at the moment. They will continue to grow substantially, will change over time. Uh, what investors are seeking and what they should be seeing is greater levels of transparency, greater governance levels, um, or at least back in those managers with those governance levels. Um, so it will evolve. We've seen a huge increase of smaller players coming to the market and private players coming to the market. Uh, and so whether they are sufficiently capable or capitalised to provide that transparency and governance will be the big issue. But the market

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is here to stay. It will continue to grow, but it will probably evolve to more of those institutional focus managers. We speak to me financial a fair bit, so I have asked this question before, but curious to get your thoughts drew in terms of demand that you're seeing when you when you talk to clients, a huge demand, um,

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uh, based on, on, uh, historic performance. So having that and being able to demonstrate how we've navigated through very challenging markets, I think is key. But there continues to be a large demand for private credit. The returns are still very favorable compared to equity investments. We think that there will continue to be a large component of private credit in the investment portfolio going forward. All right. So let's talk a little bit more about this $1 billion deal that you've announced with the global private equity firm Warburg Pincus. Just tell us a little bit about this. Well this will focus on senior secured development funding primarily in the residential markets. As I said, there is a large supply, um, requirement in that market. Strong demand. We think the pressure has eased, costs have normalised. And that's making giving greater confidence in the market going forward. Uh, and so there's been a lot of demand for institutional capital in this space. So this facilitates

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that that access. And I guess as well, in terms of I know that you're not a politician, but in terms of some of the government support that we can see in this space too. Do you think that there needs to be more? Um, uh, what am I trying to say? Just, I guess, more agreement between state and federal to try and address some of this shortage as well. It's a tough one. Uh, I went to the polling booths for local government on the weekend, and pretty much every flyer was anti-development, uh, in my local electorate, uh, whether that's in others, I suspect it's the same. So that is the challenge for government. Uh, it appears that they're trying to address it, and that's a positive thing. So planning outcomes is clearly a very challenging aspect of of our processes. Uh, there are significant time delays that these cause. And we see many developments that go through the court system to be approved through the court system. But the fact that it had to go through the court system with very little changes between what the council

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have rejected and what's ultimately been approved. So all that time and costs and the significant amount of costs that's being passed on to the consumers, there's state taxes, there are local government charges, uh, or has to be passed on. And that's having a significant impact on housing affordability and making us having a significant impact on the viability of projects as well. Developers have had to stomach significant development cost increases, um, planning charges and time delays, and the time delays when interest charges are up three times what they were. And now we're extending out for large periods of time, that is a significant impact.