For Q1 2017 originations, Senior CRE lending returns are forecast to be 3.3%pa on a gross basis and 2.9%pa on a risk-adjusted basis. This represents a decrease of 10-20bps on Q4 returns
While flat over the second half of 2016, we estimate that senior margins fell slightly in Q1 2017. A fall of around 15bps on margins on prime lending, coupled with static margins for secondary lending, combined to produce an overall decline in all property margins of 9bps.
- 5yr swap rates were essentially flat over the first quarter, ending 1bp lower than at the end of 2016.
- A weakening in the forecast for capital growth resulted in a modest rise in Probability of Default and Expected Loss over Q1.
- The key measure for banks, Return on RWA (calculated here as a function of margin and fee alone), was also lower. On an RoRWA basis, gross returns were 3.3%pa and risk-adjusted returns 2.5%pa, assuming Strong slotting treatment.
- Senior CRE lending offers an extremely healthy premium of 2.5%pa to the risk-free rate, on a risk adjusted basis.
- Against corporate debt, the relative return offered by senior CRE debt remaining very strong, at 1.7%.
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