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Income Analytics is pleased to release its latest T200 reports. Our T200 series quantifies the default risk across the top 200 standard industry classifications (SICs) for the UK, Western Europe and North America. Individual companies are given a score, reflecting their default risk, with a higher score indicating a lower probability of failure or default.

We've often focused on the risk that tenant default poses to investor income streams however our analysis also helps highlight the durability of the revenue that commercial real estate delivers. For instance, the maligned office sector scores between 82-85 out of 100 for tenant risk and is above average in all regions. The living and healthcare sectors, core focus for a lot of recent investment activity, score very well. While the retail sector scores lower, its scores are stable and have improved over the last year.

For more detail, click here to download the latest reports.

Despite a general aversion to office investment, the tenants that typically lease office space are holding up well according to our latest T200 reports. Our T200 series quantifies the default risk across the top 200 standard industry classifications (SICs) for the UK, Western Europe and North America.

In all regions office occupiers score above average and have recorded stable scores over the last 12 months or longer. In North America, where the “death of the office” is a common refrain, occupiers in this sector record the second highest score of 84/100.

Of course, stable occupier credit fundamentals do not necessarily translate to increased demand for office space, but it is a concern to take off the table when looking for risks in the sector.

In Western Europe and North America the leisure and hospitality sector tenants are showing signs of improvement, although in the UK these tenants are sliding backwards after a post-pandemic boost. Perhaps the continued cost of living crisis is hitting discretionary spend and impacting this sector; or the ending of post-pandemic life-support programmes is now seeing weaker businesses fail. Similarly, average retail occupier scores have fallen in the UK, while holding up in Europe and North America.

For more detail, click here to download the latest reports.

The European real estate fund association, INREV, released its June Market Insights paper and stated that 79% of consensus survey participants expect income return to be the key driver of performance in the short-term. That’s the highest share who think that since the start of the series back in March 2022.

Historic analysis backs this up - income return is the stabilising factor for total returns accounting for over 70% of long-term performance within MSCI real estate indices. Yield movement delivers the frothy excitement, but income keeps the lights on.

While investors focus on delivering income, bankruptcy rates have remained at elevated levels although new business registrations are finally rising (Eurostat, Q1-24). The risk a tenant could fail, or that a new business will remain around to meet its lease liabilities are significant.  This means it is vital that investment opportunities have the right tenants to ensure a long-term, stable income stream and that managers monitor changes in the tenant risk profile in real-time.

Income Analytics shows a significant range of risk across the top potential occupiers making it very important to understand the current credit risk of cashflows and the potential future risk of corporate failures.

As a case study, the chart includes analysis for the top 1,300 Western European retail occupiers by revenue. These will be the typical retail occupiers of institutional grade retail assets. There is a wide dispersion of the INCANS Tenant Global Scores (from 1 to 100). The scores predict the likelihood that a company will week credit relief or fail, 1 being the worst.

The chart shows the distribution of companies across 6 brackets. Almost 50% of companies fall within the 50-75 bracket, however 20% of companies fall into the 5-25 bracket. This is “purgatory”. Companies in this bracket will either fail at this point or find a path to recovery.

It is vital for an investor to understand the mix of tenants they have across their retail and other sector assets to ensure they have a stable cashflow.

The growing popularity of commercial real estate as an investment is hardly surprising given the prevailing central bank policy of a zero-interest rate environment. Under such conditions government and corporate bond yields no longer deliver the required returns so investors have been forced to look elsewhere for a stable and recurring revenue stream.  

In this brave new world where income is king, real estate is increasingly viewed as a good bond proxy by many in the broader financial community. However, real estate valuers, brokers, investors and lenders have no standard quantifiable measures of tenant default risk and this presents a barrier to entry for many investors who don’t feel they can accurately underwrite direct real estate investments or loans.

This is not a new problem for the sector. Indeed, the inability of investors to accurately assess tenant income default in the collateralised mortgage-backed security markets (CMBS) in 2007/8 played a central role in precipitating the Great Financial Crisis. However, despite the near-death experience felt by many in the real estate investment markets at that time very little has changed.

Read the full insight here: Quantifying the Risk of Tenant Failure

The commercial-backed mortgage security (CMBS) market faces a number of challenges. Default levels are rising and although the market might be stabilising, higher interest rates and inflation are creating headaches to those who need to refinance.

Download the full Risk Insight

A lot of focus is put on the heterogeneous nature of real estate with a recognition that every building is unique with different build quality, location and tenants. However, less effort is put into understanding the underlying risks and impact on valuation associated with the tenants that drive the cashflow.

Analysis by Income Analytics of the top 200 UK companies in each of 83 standard industrial classifications (SICs) shows a significant range of credit risk. The ranges in the chart represent the top 200 potential occupiers of prime UK assets, yet in some cases there is a 15% chance these companies will not be around to pay their rent within 5 years.

Investors need to focus on the specifics of their tenants and be aware of their income-at-risk and not rely on averages.

Income Analytics Expected Loss Adjustment Model (ELAM) provides a guide to the risk premia adjustments needed to reflect specific tenant risk. More on ELAM can be found in the technical paper

Our mission is to make accessing tenant risk analytics and monitoring on companies, CRE assets, funds and portfolios across the world as easy and intuitive as possible. Today we launch the first in our series of 'How To' videos for our clients. The first shows how to log in, purchase a company report and create an asset/building report. Every time you access your dashboard you get the latest scores and data on your chosen companies and assets.  You can watch our product video HERE.

It’s sad to hear of a traditional UK high street retailer like Wilko struggling to remain afloat. It’s bad news for the high street, its employees, and its suppliers. However, landlords renting space to Wilko should not have been surprised by the news. Income Analytics INCANS® solution has tracked Wilko’s deteriorating credit scoring for some time which allows landlords to put in place contingency plans for what best to do with the space should it become vacant. There’s a wide range of scores across UK retailers, as the chart shows. It indicates there is more potential pain to come on the high street. At a time when income is king, investors should stay on top of tenant credit risks across their portfolios.

2021 will see commercial real estate tenants will pay rent of more than US$1,400bn.

In a low capital growth market commercial real estate becomes a fixed income style investment with a floating capital opportunity attached. But, in the current pandemic, it’s important to understand the occupier, their business environment, along with specific requirements.

That need is all the greater in the many parts of the real estate market seeing increasing operating risk for landlords and their investors and lenders. But how do investors, landlords, property professionals and lenders rate, analyse and monitor their income risk and what tools and data exist to support them in this task?

Read the full insight here: How well do you know your tenants income risk?

How often have you described an asset as “prime” because it sits in London’s West End? Or “opportunistic” because of an emerging asset class? Such labels are a form of “information framing” and it is natural human behaviour. The way choices are presented can influence our thought processes and ultimately our decisions. This can play out badly in many situations. In commercial real estate, there is plenty of evidence that shows how often investment decision-making processes are fundamentally flawed because of how we label and use much of the information and data available to us.

Today, a real estate fund manager can walk through the door and describe the perceived risk profile of an asset or fund with one word: “prime”, or “core”. In contrast the risk profile of a bond fund would be determined by risk & return metrics not simply the opinion of the fund manager. What is needed in real estate investment markets is a structural rethink of how investors can assess an opportunity, using quantitative data rather than subjective labels based on postcode or use class, created by the long line of investors and agents who came before. With the tools available today, this is certainly possible.

Read the full article HERE.