27 Apr White Paper – Commercial Mortgage Loans
Voya Investment Management – Commercial Mortgage Loans
This paper explores the features, advantages and benefits of investing in commercial mortgage “whole” loans – debt instruments secured by income producing commercial buildings such as offices, apartments, industrial properties and shopping centres. A pillar of insurance company portfolios for many years, the asset class is less well understood outside the insurance industry. Historical simulations, however, show the potential of commercial mortgage loans to expand the attainable efficient frontier for institutional investors.
Commercial mortgage loans provide attractive opportunities to realise incremental yield spreads and other benefits for investors whose objectives make their distinctive characteristics suitable. Among other compelling characteristics, the paper finds that: commercial mortgage loans have historically offered attractive and stable income, efficient diversification, favourable risk-based capital treatment, yield protection and tax efficiency; commercial mortgage loans have had a strong return-to-risk ratio, historically producing returns similar to Commercial Mortgage Backed Securities (CMBS) – with less than half the risk; that life insurers are the leaders in commercial mortgage loan resources, with many years of experience, extensive loan origination networks and sophisticated servicing systems; and that commercial mortgage loan portfolios managed by insurance companies have tended to perform better than the overall market, due in part to conservative underwriting standards.