The mechanism here is pretty straightforward. Energy is an input cost in virtually everything – manufacturing, transport, construction, food production. When the price of oil and gas rises sharply, inflation follows. Not immediately, not all at once, but it follows.

The conflict has already disrupted approximately 20 per cent of global crude oil supply transiting the Strait of Hormuz. Around 110 billion cubic meters of LNG exports that normally flow through the strait have been disrupted since late February. These are not small numbers. Goldman Sachs Research estimated that even a four-week full halt of flows through the strait would add roughly $14 per barrel to the risk premium in oil markets. Brent is already trading at over $100 a barrel as I write this.

Australia is a significant net importer of refined petroleum products. We feel oil shocks at the bowser, in freight costs, in construction materials, in food prices. The pass-through is real and it takes time — typically three to six months for the full inflationary impulse to work through the domestic CPI basket. But it comes.

The February RBA rate rise – 25 basis points, the first move of a new tightening cycle — was already baked in before this conflict escalated. The question is what happens next. Our view, before the oil shock, was that there could be a further two to three rises over the course of 2026. In light of what’s happening in global energy markets right now, we have higher conviction in that view. We think it is now very likely that the cash rate reaches 4.5 per cent within 2026. 

Let’s start with the simple part, because there is a simple part.

All of Ark’s existing investments are structured as a fixed margin over the cash rate. When the cash rate rises, the return that flows through to our investors rises with it quickly, because our structures pass rate increases through almost immediately. This is the asymmetry that I’ve written about before: rate rises flow through fast on the way up, more slowly on the way down.

So from a pure income perspective, a rising rate environment is directly positive for the returns our investors are receiving. If the cash rate moves from where it sits today to 4.5 per cent over the next 12 months, the income return in our portfolio moves with it.

The more nuanced question and the one that takes longer to answer – is what impact rising rates and higher construction input costs have on the projects we’re funding. This is where I want to spend a bit more time, because the answer is more layered.

The first thing to understand is that rate movements don’t affect all development projects equally. The key variable is time — specifically, the duration of the loan. The longer a project runs, the more it’s exposed to rate movements, cost escalation, and shifts in end-market demand. A 36-month loan carries fundamentally more rate risk than a 12-month loan. This is one of the core reasons Ark has deliberately built a portfolio concentrated in shorter-duration lending — typically 12 to 24 months — in residential land development and industrial land development. It’s structural discipline, not just preference.

The second thing to understand is that the direct interest cost on a development loan is usually not the determining factor in whether a project stacks up. Let me give you a feel for the numbers. On a typical residential land development project funded at an Ark facility, the total interest cost might represent somewhere between 2 and 4 per cent of the total project cost. A 100-basis-point move in the cash rate shifts that by perhaps 30 to 50 basis points on total project cost. Significant in isolation, but usually not the swing factor between a viable and non-viable development.

Where rate movements do matter more — and this is the part that gets less attention — is through their effect on land values. Land value is ultimately a function of the present value of future cash flows: what can you sell the end product for, discounted back at the prevailing rate? When rates rise, that discount rate rises, and land values come under pressure. We saw this clearly during the 2022-2024 tightening cycle, when new dwelling loan commitments fell 30 to 40 per cent peak-to-trough and building approvals declined by roughly 20 to 30 per cent over a similar window.

In the current environment, with energy costs adding to construction input costs and the prospect of further rate rises ahead, we’re watching land values in our key markets carefully. The good news is that the structural undersupply of housing in south-east Queensland, Adelaide, and WA — our three priority growth states – continues to provide a strong demand floor. Population growth, defence spending, and state government investment in these markets don’t disappear because oil prices spike in the Middle East. But they’re not immune either, and we’re not pretending otherwise. 

The honest answer is: the same way we always do.

Every new investment opportunity that comes across our desk gets assessed on its individual merits — the quality of the borrower, the strength of the security, the viability of the underlying project, the exit strategy. That doesn’t change in a crisis. Some areas of a project get more focus i.e. construction cost escalation, but overall our approach is the same – rigorous deal-by-deal assessment always matters.

That said, a rising rate cycle does shift the landscape in ways that are worth being explicit about.

First, returns from private real estate credit rise in a tightening cycle. This is the straightforward upside of a floating-rate structure. New deals that we write today carry a higher return than deals written 12 months ago. For investors coming into our funds now, or increasing their allocations, they’re doing so at an attractive point in the cycle from a return perspective.

Second, credit selection becomes more important, not less. In an environment where borrowing costs are rising and input costs are elevated, the margin for error on poorly structured deals narrows. We’ve always been selective. We’ll continue to be. A shift in the macro environment is never a reason to reach for yield by accepting lower-quality deals — it’s a reason to hold the line on credit standards while benefiting from the rate tailwind on well-structured transactions.

Third, the energy shock adds a new input cost dimension that we’re specifically monitoring for construction-phase loans. Diesel, electricity, and transport costs are meaningful components of construction budgets. A sustained period of elevated energy prices will put upward pressure on construction costs in a market that was already experiencing cost escalation. We’re factoring this into our assessment of feasibility margins and construction contingency allowances on new deals. We want to see adequate buffer.

Fourth — and this is worth saying plainly — we’re not deploying capital into every deal just because the headline return is attractive. A 12 per cent return on a badly underwritten deal is worse than a 10 per cent return on a well-underwritten one. The discipline of partner selection, property-level due diligence, and conservative LVR sizing doesn’t flex with the rate cycle.

This one is interesting, because what we’re seeing now rhymes closely with what happened during the 2022-2024 rate tightening cycle — only faster, and with a geopolitical overlay that adds an extra layer of uncertainty. 

When rates began rising sharply in 2022, something notable happened in institutional and high-net-worth portfolio allocation. Rather than retreating from private credit, sophisticated investors increased allocations to it. The logic was sound: floating-rate private credit provided inflation linkage (returns rose as rates rose), lower volatility than listed markets (which were selling off sharply), and genuine portfolio diversification. Private credit investments, particularly in real estate, demonstrated their worth as a ballast in a turbulent portfolio. 

The evidence from that period is instructive. Private credit has outperformed publicly traded syndicated loans in every vintage year from 2000 to 2023, often by 0 to 3 per cent per annum over a decade. The 2022-2024 tightening cycle was not an exception — managers with well-structured floating-rate portfolios delivered strong outcomes precisely because their returns moved with the rate cycle. 

We’re already seeing echoes of this dynamic in the current environment. Global capital markets are volatile. Equity markets are down materially since the conflict escalated — the Dow fell over 700 points in a single day in early March. Bond yields are spiking as inflation expectations reprice. In that context, the characteristics of private real estate credit — predictable income, floating rate returns, secured lending, lower mark-to-market volatility — look increasingly attractive on a relative basis. 

For our investors, the natural questions are: does a crisis like this change my view on private credit as an allocation? And does it change my view on Ark specifically? 

On the first question, our view is that it strengthens the case. The inflation transmission mechanism we’re watching — energy prices to CPI to RBA action to higher returns in floating-rate credit — is exactly the environment where private real estate credit earns its place in a portfolio. It’s not correlated to equity market sentiment. It’s not subject to daily mark-to-market volatility driven by geopolitical news flow. And it provides a genuine return uplift as rates move higher. 

On the second question – Ark specifically – we think our focus on shorter duration land development loans; and geographic focus on Queensland, South Australia, and Western Australia is genuinely advantageous in the current environment. These are the states with the strongest population growth dynamics, the most significant government infrastructure investment pipelines, and the most compelling housing supply-demand imbalances. They’re not immune to macro headwinds, but they’re considerably better positioned than Victoria or New South Wales, where our exposure has been deliberately reduced. 

We’re also conscious that in uncertain times, investors naturally reassess their managers. That scrutiny is healthy, and we welcome it. Our track record, our credit process, our geographic diversification, and our disciplined approach to deal selection are all things we’re comfortable putting under the microscope. 

Crises create noise. They also create clarity — about what you own, why you own it, and whether it’s doing the job you need it to do. 

Private real estate credit in a rising rate, higher inflation environment should do exactly what it says on the tin: deliver higher returns, maintain capital protection through secured lending structures, and provide portfolio stability when other asset classes are repricing sharply downward. 

We’re not in the business of predicting how or when the conflict in the Middle East resolves. We don’t know if Brent crude settles at $90 or $110 or $80. We don’t know exactly how many more times the RBA moves, or by how much. What we do know is how to structure credit, how to assess risk, how to select the right partners, and how to manage a portfolio through a cycle. 

We’ve been at this for a long time. We’ve seen rate cycles, credit cycles, and more than a few moments of global uncertainty. Our job is to stay disciplined, stay focused on the fundamentals, and keep our investors well informed. That’s what we’re doing. 

If you’re an investor, borrower or strategic partner who values forward-thinking leadership, now is the right time to connect.

Let’s talk about where you want to go and how we can help you get there.