Over the past two and a half years, rising interest rates have created higher yields for commercial real estate (CRE) credit investments. Banks, which have traditionally been the largest lenders in this sector globally, have reduced their activity due to regulatory changes and shifting monetary policies. As central banks begin to ease interest rates and banking regulations evolve, private CRE credit investment presents a compelling opportunity.
The Federal Reserve and other global central banks implemented significant interest rate increases between 2022 and 2023, marking one of the sharpest rate hikes in recent history. While these actions initially suppressed property values, they have also led to higher debt yields. Although central banks are now signalling lower rates in the future, the likelihood of returning to the near-zero levels seen post-2008 is slim. Consequently, CRE credit investments are expected to continue offering yields above historical averages, bolstered by moderated interest rates.
Global real estate markets have also seen a decline in asset values, largely attributed to these higher rates. For instance, US property values dropped by 21% from their peak in 2022, with similar trends observed in Europe. However, recent signs suggest stabilisation, particularly in the US, where property prices appear to have bottomed out. This correction in values provides a safer basis for new loans, reducing risk for investors while offering attractive opportunities in the real estate credit market.
At the same time, tighter banking regulations—such as increased capital reserves and stricter risk assessments—have limited traditional banks’ capacity to provide CRE financing. This is opening up space for alternative lenders to step in, particularly as new regulations may lead to further restrictions on banks. Private lenders now have the potential to fill the gaps left by these changes, expanding their role in the sector.
While private real estate credit offers promising returns, it does come with inherent risks. Market fluctuations, tenant turnover, and broader economic changes can all impact returns. Additionally, the liquidity of real estate assets and credit investments may vary, requiring careful planning and management.
Private real estate credit presents a compelling opportunity due to elevated yields, stabilising property values, and reduced competition from traditional banks. Although challenges such as regulatory shifts and market risks remain, the current landscape offers a favourable environment for investors seeking higher returns and diversified investment opportunities.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
