For Q4 2016 originations, Senior CRE lending returns are forecast to be 3.4%pa on a gross basis and 3.1%pa on a risk-adjusted basis. This represents an increase of almost 40bps on Q3 returns.
For the second quarter in succession, we estimate that senior margins were flat over Q4. Thus, we estimate that over the whole of 2016, margins rose by c40bps at the aggregate all property level, with the bulk of that movement occurring in the final week of June after the Brexit vote.
5yr swap rates rose 37bps over the fourth quarter, ending 2016 72bps lower than at the end of 2015.
A further modest improvement in the forecast for capital growth resulted in a slight decline in Probability of Default and Expected Loss over Q4.
The key measure for banks, Return on RWA (calculated here as a function of margin and fee alone), was flat. On an RoRWA basis, gross returns were 3.5%pa and risk-adjusted returns 2.9%pa, assuming Strong slotting treatment.
Senior CRE lending offers an extremely healthy premium of 2.6%pa to the risk-free rate, on a risk adjusted basis.
Against corporate debt, the relative return offered by senior CRE debt held firm at 1.8%, remaining at a two year high.
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