Insurance Company Offers Better Commercial Loan Terms Than Banks

December 08, 2011 / Elizabeth Buckley, Commercial Property Analyst

Banks are scaling back on the commercial real estate loans leaving insurance companies to pick up the slack. The insurance companies are offering the best terms according to knowledgeable real estate analysts. Commercial property is being approved for loans in the amount of 69 percent of property value. This compares favorably with the average of 66 percent. These insurers are charging an interest rate that is 20 to 30 basis points below average. One basis point is defined as 0.01 of a percentage point.

Insurance Company Offers Better Commercial Loan Terms Than Banks

Predictions are that insurance companies in the UK may account for 20 percent of businesses producing commercial real estate loans in the future. Ten businesses were calculated to be responsible for 14 percent this year. These ten included such well-known names as MetLife Inc. and Prudential.

Banks in Europe cut back on loans since the third quarter of 2007. When the property drop occurred after the financial crisis, they took losses in the amount of 525 billion euros ($701 billion). The banks have traditionally led the real estate lenders. They have held only one notable sale of securitized loans since 2007.

Securitized loans turn assets into securities by selling them to a trust or corporation. Thus, the risk is reallocated and liquidity is increased for the lender. Changes are being suggested to make real estate lending more lucrative than real estate purchasing. This set of proposed insurance investment rules is called Solvency II.

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