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Asset Allocation Rising Rates White Paper

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

28 November 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
9%
Approximate capital charge for commerical real estate under EU regulations
Authors
Clark Coffee| Chief Investment Officer and Head—European Commercial Real Estate Debt
Richard Roberts, ACCA, CFA| Head—EMEA and Asia Insurance Business Development

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 and are subject to change over time.

About the Authors

Clark Coffee is the Chief Investment Officer and Head of European Commercial Real Estate Debt. His previous business, Lacarne Capital, was acquired by AB in 2020 to establish the firm’s real estate debt business in Europe. Previously, Coffee was head of Tyndaris Real Estate, where he was responsible for building the business into a top-10 real estate debt fund in Europe. Prior to that, he co-headed origination for Deutsche Bank’s European commercial real estate credit business and oversaw the risk management and restructuring of more than €2 billion of troubled loans during the global financial crisis. Coffee holds a BA in economics from Lake Forest College and an MBA from the University of Michigan. Location: London/Frankfurt

Richard Roberts is a Vice President and Head of EMEA and Asia Insurance Business Development. Working closely with the Insurance Portfolio Management team and AB’s client advisors, he is responsible for partnering with insurers across the EMEA and Asia regions to develop solutions that meet the unique requirements of this industry, be it yield, diversification, solvency efficiency or targeting sustainability objectives. Roberts also supports the development of insurance thought leadership for direct consumption by insurers across a broad variety of topics. Prior to joining AB in 2022, he was a global insurance investment director for abrdn, where he was responsible for supporting the development of insurance investment solutions for clients across the EMEA and Asia regions. Before this, Roberts spent 13 years with Zurich Insurance in a variety of insurance investment roles, culminating in the role head of balance sheet investments for their UK business, where he was responsible for investment strategy across both Life and Property & Casualty general accounts. He is a chartered accountant and a CFA charterholder. Location: London

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