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Lenders are getting better risk-adjusted returns in the UK real estate market than investors, according to a research paper from CBRE Investment Management.
Given the prospects for returns over the next five years, there is better relative value to be found in being a lender in almost all real estate subsections, CBRE IM’s Credit Calls paper said. And despite the recent rise in interest rates, real estate lending still offers an attractive premium for fixed-income investors compared to buying government bonds or the bonds of blue-chip companies.
Times of market uncertainty typically see traditional lenders like banks become more cautious, offering good opportunities for debt funds, CBRE IM Managing Director and co-head of EMEA Credit Strategies Emma Huepfl told Bisnow.
“You get into deals that you otherwise wouldn’t,” she said. “You can go down the risk curve and get into better deals and still get paid for it.”
Beyond the opportunity created by a more risk-averse attitude among other lenders, providing debt looks compelling compared to being an equity investor, Huepfl and CBRE IM Senior Director of Credit Research Dominic Smith agreed.
The Credit Calls paper broke down investors willing to go into debt into two broad camps — those coming from the fixed-income world and concerned with mitigating risk, and those that might typically be real estate equity investors looking for good returns.
For fixed-income investors, even though bond yields have gone up, making bonds look more attractive, real estate lending still offers higher returns for an acceptable level of additional risk, the paper argued. This kind of investor should look at providing debt for logistics investment at loan-to-value ratios up to 70%; debt for rented residential at LTVs of 50%-60%; and debt for student accommodation at an LTV of up to 65%.
For investors focused on return, CBRE IM said that in most real estate asset classes, lenders are getting a disproportionately high return from deals relative to risk taken compared to what the equity investor is receiving.
This made it a good time to be a lender, per the report, which found the best kind of loans were "bridge to sale" loans for residential developers, or loans where the development is complete, but the units are not yet sold. It cited up to 70% LTV for such loans. Loans in which properties undergo ESG-led refurbishments see up to 70% loan to cost, and loans for retail investment up to 65% LTV.
“In three of the five sectors we looked at, debt returns were higher than equity returns,” Smith said.
More broadly, Huepfl and Smith said the rise in interest rates and increased cost of lending would make the market less debt-driven going forward. Even though equity investors are not affected by the increased cost of debt and, in theory, could pay the same prices, the fact there was less competition, in addition to the increased cost of debt, would still have an impact on valuations.
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