Debt regulation is to blame for some of Deutsche Asset Management’s lowered real estate returns last year, but one real estate executive said he prefers current regulations to a looser regulatory environment.
Kevin White, the firm’s head of Americas strategy, cited a slowdown in debt capital flows as a damper on the firm’s real estate returns, which dropped from a post-recession average of 12 percent to 8 percent last year.
At a Monday press breakfast in the firm’s New York office, White said that banks, under pressure from federal regulators, have pulled back their commercial real estate loan activity “pretty significantly,” which translates to a higher borrowing cost and a slowdown in supply.
Commercial mortgage backed securities issuance dropped to $63 billion in 2016, from $95 billion the year before, due to bond-market volatility and the implementation of risk-retention rules, according to Deutsche’s US Real Estate Strategic Outlook report. The risk-retention rules, which took effect in December, require lenders to retain at least 5 percent of a loan’s value, making capital more scarce and expensive.
White said that despite the US’s post-recession emphasis on regulation, some federal groups, including the Federal Reserve, are “misreading the market” by assuming the commercial real estate industry is overheated.
“They’re a little bit more alarmed than they should be,” he said. “I strongly believe there’s no bubble in commercial real estate today… I don’t see signs of too much leverage, which is a hallmark of bubbles.”
Despite the higher cost of capital, White said more regulation is beneficial because it helps temper supply. He cited overbuilding as one of the lessons learned from the recession.
“If we open the floodgates again, if we have a dramatic loosening in regulation, I think that could feel very good for a number of years and we’d see very strong returns,” he said. “But it could lead to a more boom-bust situation, whereas today, we have a stable, muted outlook for returns going forward.”
Deutsche manages $90 billion in alternatives, with $55 billion in real estate assets.