Commercial real estate (CRE) credit yields have benefited from higher interest rates over the past two years. And while central banks have started to cut policy rates, we believe that the CRE credit sector remains attractive for three reasons:
1. Higher interest rates
Central bank policy rates remain materially higher than pandemic levels. And longer-term policy rate targets are meaningfully above levels following the Global Financial Crisis (GFC), which is helping to support yields.
2. Reduced basis
Real estate equity prices are in the process of resetting, providing a reduced basis relative to pricing of 24-30 months ago.
3. Tighter bank regulation
Proposed intensification of bank capital requirements could result in diminished bank lending activity, leaving a gap for non-bank lenders to fill. Banks have traditionally been the largest providers of commercial real estate credit around the globe, typically providing roughly 50% of CRE credit in the US, 60% in the UK, and over 80% in Europe and Australia.1
Taken together, the potential for yields above post-GFC levels at a reduced basis are attracting attention to private real estate credit investing. And access to opportunities could expand as the application of currently proposed bank regulations could dampen bank lending activity in commercial real estate, leaving a gap for alternative lenders to fill.
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1 Sources: US-Federal Reserve, June 30, 2024; UK and Europe-Bayes Business School, City University of London, October 2023; and Australia-Savills Investment Management, July 2023.
Image: kokouu / Getty.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Generally, real estate assets are illiquid in nature. Although certain kinds of investments are expected to generate current income, the return of capital and the realization of gains, if any, from an investment will often occur upon the partial or complete disposition of such investment.
Investing in real estate typically involves a moderate to high degree of risk. The possibility of partial or total loss of capital will exist.
Investing in commercial real estate assets involves certain risks, including but not limited to: tenants' inability to pay rent; increases in interest rates and lack of availability of financing; tenant turnover and vacancies; and changes in supply of or demand for similar property types in a given market.
