CRE Mortgage Investments Pay Off Huge for Life Insurers in Q2

Road to Recovery? Confidentiality Agreements for Industrial, Multifamily Properties Bounces Back

Life insurance companies with commercial mortgage investments performed better than expected despite the economic chaos resulting from the coronavirus pandemic.

According to Trepp, they achieved a return of 4.58% in the second quarter.

"While the surge in returns wasn't exactly unexpected, the extent of the recovery was somewhat surprising," said Russell Hughes, leader of data consortium initiatives at Trepp, in prepared remarks.

The second quarter return is a "big reversal" from the negative 1% in the previous quarter and was the second-largest increase in 94 quarters according to Trepp's August LifeComp's Commercial Mortgage Index.

The index comprises approximately 7,600 active loans with total capital of USD 148 billion and an average loan-to-value ratio of 50%.

The above-expected return is good news as it happens amid the still-raging pandemic that has hit hospitality and retail the most. States and local governments in the United States have ordered non-essential businesses such as hotels and shopping malls to temporarily close to curb the spread of COVID-19. The rate of reopenings has changed, and some US cities have only just emerged from lockdowns, the final impact of which on housing and retail remains to be assessed.

LifeComps' mortgage risk in the hotel and retail asset classes varies as the accommodation risk is low while the consumer risk is "material". For LifeComps, the retail mortgages speak mostly for properties that are doing better than others in the grocery store thanks to their tenants, or for key stores that have stayed open during the pandemic.

The life insurance companies also invest in multi-family, industrial and office mortgages. Multifamily performed best of the five asset classes last year with a return of 7.3%. Industrial followed with a return of 6.6% and Office with a return of 6.03%.

On a rolling four-quarter basis, life insurers' commercial mortgages returned 6.39%, which was 4.37% on income and 2.02% on price.

The second quarter return is around 1.05% which comes from income and 3.52% from price. The healthy price hike is due to persistently low interest rates and an easing of credit concerns.

Arrears remained low at 0.06% and depreciation remained low at 0.004%, while specific reserves increased by 13%.

While credit concerns are lessened, the Trepp report found that more than 120 deferred loans and interest payments of more than $ 31 million are being capitalized.

"For the most part, the credit problems do not appear to be structural," says the Trepp report, "and there is a reasonable expectation that the credit will work over the long term."


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