Since the onset of the Federal Reserve’s interest rate tightening cycle in the first half of 2022, credit strategies’ absolute yield has outperformed by 15 basis points. This compares to equity strategies’ yield outperforming by 220 basis points on average during much of the past cycle when interest rates were lower, speaking to the relative favourability of credit strategies.

Lending activity during the past decade was notably more balanced and diversified compared to the period leading up to the GFC, where CMBS loan origination volume totalled 54% of originations. Debt funds, insurance companies — and, in the US, government agencies — have all accounted for a greater share of loan origination than CMBS in recent years.

And the average loan-to-value ratio of loans originated in the US since 2020 is 55%, a full 14 percentage points lower than the average ratio in 2007, generally indicating more conservative market behaviour. Loan-to-value ratios have ranged between 45% to 75% across larger European markets this cycle, and 40% to 60% across the larger markets in Asia Pacific.

New sources of debt are arising to complement funding options in markets and sectors where lenders are more cautious. Since the Global Financial Crisis (GFC), debt funds added significant lending capacity to the US market amid the slowdown of commercial mortgage-backed securities (CMBS) activity.

Loan maturities will catalyze transactions activity and, in some cases, distress. This will result in pressure in a multitude of situations, along with a significant opportunity for investors to deploy across the capital stack and risk spectrum through mezzanine financing, rescue capital or other structures, giving them exposure to new property sectors and geographies.

In terms of new capital, we expect private credit will continue to proliferate. Private credit can span multiple strategies, such as direct lending, mezzanine or preferred equity, and distressed debt. Significant opportunities exist for private credit as it relates to the wall of upcoming loan maturities in real estate as well as rescue-financing capital. In Asia Pacific, a wave of overseas private equity investors is ramping up their regional credit strategies.

The next several years are expected to offer an attractive environment for private real estate credit, where investors stand to benefit from opportunities where financing options from banks and other traditional lender types are more subdued.