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:
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.
Sources: Invesco Real Estate, utilizing historical data from Moody's Analytics as of October 2024 and the Federal Open Market Committee (FOMC) median forecast as of September 18, 2024 (most current available). Based on FOMC the longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Single-year estimates and forecasts are for the end of calendar years. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, there can be no assurance that actual results will not differ materially from expectations.
Real estate asset values have fallen in almost all key global markets since early 2022 due to elevated interest rates and easing economic growth. As an example, in the US, Green Street data shows commercial real estate prices held in private markets peaked in March 2022 and have since fallen through August of this year by 21% on average, with variation by property type. A similar magnitude of correction has been seen across European markets, with slightly less change in the Asia Pacific region (due to stability of Japan interest rates during this period). For those investing in real estate debt today, this means that new vintage loans will be sized against collateral values that are lower than peak values of early 2022, which may result in less risk within the capital stack.
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, 30 June 2024; UK and Europe-Bayes Business School, City University of London, October 2023; and Australia-Savills Investment Management, July 2023.
The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations. Investors may not get back the full amount invested.
Property and land can be difficult to sell, so investors may not be able to sell such investments when they want to. The value of property is generally a matter of an independent valuer's opinion and may not be realized.
Alternative investment products may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for private equity interests, and none is expected to develop. There may be restrictions on transferring interests in such investments.
All data is provided as of September 2024, sourced from Invesco unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
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