CRE Debt To Offer Investors Three Times The Level Of Return Availlable From Gilts

A new index analysing the average returns lenders to the UK commercial real estate (CRE) market can expect, shows that real estate debt will provide far better returns than competing financial instruments.

CBRE’s first report forecasts that over the next five years senior debt returns against UK CRE will be 3.7% on a risk adjusted basis. This compares favourably with the five year Gilt yield of 1.2%, and offers investors a 2.5% premium. Over the long-term, CBRE estimates that senior CRE debt has offered a premium to Gilts of c. 0.5-1.0% – making current lending conditions extremely attractive. With capital growth forecast to be 3.3%pa over the next five years, Probability of Default is set to be just 4%, some way below the long-term average, and Expected Loss minimal.

Mezzanine lending* returns, at 5.2%, offer a further premium to returns on senior lending, though a narrower one relative to the last couple of years.

Dominic Smith
“There has been a recent drop in returns on commercial property debt, predominantly due to falls in interest rates, margins and arrangement fees. Despite this significant downward pressure on returns to lenders, CRE debt continues to offer a very healthy premium to the risk-free rate. As a consequence we believe insurance companies and other non-bank lenders will continue to be attracted to the premium available, while the second half of 2014 undoubtedly demonstrated that traditional lenders are increasingly returning to the sector drawn by the benign outlook for capital value growth.”
Dominic Smith