Asset Allocation Rising Rates White Paper

Mind the Gap: Commercial Real Estate Debt and the Opportunity for Insurers

November 28, 2023

1 min read

What You Need to Know

The tectonic plates are shifting in the commercial real estate market. High interest rates have reset property values while banks are facing stricter regulatory pressure that has impaired their ability to lend. Yet finance needs for commercial property owners remain strong. This presents a unique opportunity for private, nonbank lenders to fill the gap.

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$19.5 trillion

Size of the global investable commerical real estate market in 2022

€900 billion

Estimated European commerical real estate debt maturities by 2025

Approximate capital charge for commerical real estate under EU regulations

Authors

Private commerical real estate debt, in our view, is particularly attractive today for insurance companies, who face their own unique challenges. It offers an opporunity to achieve attractive risk-adjusted returns while matching liabilities and making efficient use of solvency capital budgets.

The opportunity appears especially compelling in Europe, where regulatory changes have been steadily driving banks to reduce capital available to commercial real estate borrowers. Borrowers are turning instead to alternative lenders, and with credit generally less available, these nonbank lenders are increasingly able to negotiate stronger loan terms and higher yields.

In this environment, we believe a selective allocation to privately originated commercial mortgages may be an effective way for insurers to broaden exposure to real estate. It also offers a way to enhance risk-adjusted return potential relative to public fixed-income assets with similar credit and duration profiles.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

About the Authors