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Determinants of credit spreads and cash flow-related lending in commercial real estate

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  • Haffki, Ricarda
  • Hennig, Kerstin

Abstract

The study examines risk-specific determinants of credit spreads and underwriting practices for non-recourse commercial real estate loans using property and loan characteristics. We use the case of banks that maintain their loans on balance sheets and concentrate on non-recourse financing of large cash flow-generating properties in Europe and North America. The unique dataset includes the bank’s credit loan ratings, used in a 2-stage least square estimation as an instrument for the LTV ratio to address endogeneity bias. Additionally, we use the debt yield premium as a second instrument to validate our results. Our findings demonstrate that default risk and credit spreads depend on potential changes in cash flow and property value, which may deteriorate future underwriting ratios, as well as on measures taken to mitigate this risk. The results indicate that banks effectively adjust the loan’s minimum debt yield ratio to potential negative changes.

Suggested Citation

  • Haffki, Ricarda & Hennig, Kerstin, 2025. "Determinants of credit spreads and cash flow-related lending in commercial real estate," Research in International Business and Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:riibaf:v:74:y:2025:i:c:s0275531924004628
    DOI: 10.1016/j.ribaf.2024.102669
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    More about this item

    Keywords

    Commercial real estate loans; Non-recourse; Credit spreads; Cash flow-Related lending;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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