After working hard to fulfil annual lending targets in the first half of the year, a number of lenders have chosen to be more circumspect since the Summer, with the result that senior margins edged upwards by c5bps over the third quarter. At the same time, spreads on CMBS have increased by significantly more over the same period. CMBS pricing, in other words, has been much more responsive to the global market jitters that have afflicted investors over the past three months. As a result, BBB CMBS now offers an 80bps premium to senior CRE debt, compared to a 20bps discount six months ago.

We noted in our last update that the ‘once-in-a-generation’ returns of a couple of years ago, when senior CRE debt gave a premium over Gilts of 4%+, have gradually given way to a market where the returns on offer pretty much match reasonable expectations. With little significant change in lending terms or in underlying property market outlook over the past few months, this remains the case – non-bank lenders are still getting a very nice premium over Gilts, bank lenders are still meeting or exceeding typical benchmark Return on RWA targets. However, past experience suggests that markets are seldom all things to all men for long; it is only natural to expect returns to come under renewed pressure in the future, at which point those lenders who have been most careful in their selection of borrowers and assets will see the greatest rewards.