Gross returns on senior commercial real estate lending rose from 3% to 3.4% in Q4 2016, according to CBRE’s latest Debt Prospects MarketView.
The premium on gilts for commercial real estate debt widened to 2.9% on a gross return basis, while senior lending margins stayed flat for a second consecutive quarter.
Margins across all property rose by about 40bps in 2016, with most of the rise coming after the referendum, according to the report.
CBRE also said that terms are generous towards development lending as lenders that finance fully prelet developments receive a premium of about 90 bps over prime investment lending.
Those who take on speculative development lending get an extra 140 bps over secondary investment lending.
Despite this, the report said the slotting framework, which categorises property loans by risk, has led to a shortage of development finance.
Steve Williamson, head of debt and structured finance at CBRE, said: “The estimated returns on development finance in the current climate are extremely strong. The additional margin and reduced LTV afforded to development lending versus benchmark investment lending gives the lender additional protection against adverse capital growth.
“It is therefore an excellent opportunity for those lenders who are willing to see beyond the initial risk factor.”
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