The cost of borrowing to finance commercial real estate has fallen so much it is deterring lenders, according to CBRE.
Returns on lending fell to 3.7% in the second quarter, down 100 bps over the six months to the end of June, the agent said.
Lenders are still achieving a 2.5% premium over the benchmark Gilt rate but the spread to other investments has widened over the same period, making property lending less attractive as a “value play”, CBRE said.
For banks the risk-weighted returns on assets were forecast to be 1.6-2.6% compared with 1.8-3% at the end of Q1 and 2.4-4% at the end of 2014.
Dominic Smith, head of real estate debt analytics at CBRE, said: “For banks, returns on risk-weighted assets are approaching the level of around 2%, at which they may not meet cost-of-capital hurdles. For other lenders, the relative value play that enticed them into the sector has narrowed noticeably. We may therefore be approaching a point when lenders’ resolve is tested.”
