Thursday, December 1, 2011

Investors Flee Towards Attractive Debt and Equity Yields, RECI Reports


CHICAGO, IL, Dec. 1, 2011 -  The Real Estate Capital Scoreboard issued by the Real Estate Capital Institute reports the jittery stock market keeps real state capital on the forefront of activities, as investors flee towards attractive debt and equity yields offered by brick-and-mortar versus low yielding corporate bonds and other less profitable investments.

 Even as markets fluctuate, interest rates remain steady with mortgage spreads continuing an overall downward draft with more CMBS and bridge lenders returning to the market.

Market highlights for the month are as follows:

·        Project cash flow is the be-all-end-all any type of successful financing, although more new construction projects in select markets are now progressing.
  •  As interest rates decline, more lenders have been relaxing theirreliance on debt coverage ratios as an underwriting standard.  They are underwriting to more traditional benchmark levels including 75% leverage and debt yield has now become one of the most important underwriting metrics, particularly with the CMBS industry, hovering in the low double-digit range for non-multifamily properties.
         While fixed-rate debt is attractive, watch for rising international bank rates as European banks unravel their banking problems.  Still extremely low, LIBOR has increased 20 basis points since summer, potentially creating more concerns about floating-rate debt.
  • Non-Agency funding sources continue exploring alternative property types, over-and-above multifamily assets, as yields are driven to minimum levels within this asset class.  Retail and industrial properties are the largest beneficiaries, yet office and lodging are gaining popularity.
        Key benchmark treasury rates the five and 10-year notes, tightened to a range of about 100 basis points of each other, while overall spreads for mortgages are within 20 basis-point premium for the shorter-term maturities.  That said, commercial mortgage rates are still at historical lows and mortgage spreads over treasuries remain flat.

  • In the next few months expect mortgage spreads to tighten even further, as much as 50 to 75 basis points, as lenders remain awash with funds and continue to elect lower pricing, rather than compromising on asset quality.  Within the past month, for example, CMBS pricing over swaps dropped 20 to 50 basis points.
 According to Jeanne Peck (top right photo), the Real Estate Capital Institute's Director, "The commercial property sector is bifurcated into haves and have-nots, with a substantial difference existing between credit and noncredit financing options.  The real estate markets are no different than the overall credit markets as far as trying to pinpoint successful businesses."

Contact:
The   Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624

Jeanne Peck, Research Director

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