Office property developments can be “interesting lending opportunities” right now as the asset class suffers from a credit crunch, according to Paul Kelly, the head of alternative assets at Deutsche Bank AG’s investment arm DWS Group.
The market for US commercial real estate has experienced “lender pullback” with more than $2 trillion in loans coming due before 2028, Kelly wrote on Monday in an investor letter seen by Bloomberg News. “Private capital can help fill this funding gap.”
Kelly joins a growing number of finance executives who think the effort by many banks to cut debt exposure to commercial real estate amid plunging valuations and rising defaults can offer opportunities for others. That comes in the wake of an earnings season that has seen many banks in the US and Europe report soaring credit provisions for their property loans, especially those linked to US commercial real estate. The retreat of banks from the sector has helped drive up loan margins, allowing alternative lenders to charge more.
Standard Chartered Plc Chief Executive Officer Bill Winters echoed Kelly’s sentiment last week, saying that the current environment could offer an opening for the lender to increase its “relatively little exposure” to CRE. Similarly, Allianz CEO Oliver Baete said the same day that fire sales carried out by former real estate tycoons to service debt could be a chance to snap up properties at bargain prices given the huge discounts the sellers sometimes need to accept.
The current year “should provide an attractive entry point to capitalize on the coming real estate cycle,” Kelly said in the letter. Logistics and residential real estate will likely offer some of the highest returns, he said.
‘Milestone Years’
“History has shown us that the years after a major price correction have tended to be some of the best milestone years for capital investment,” he said, but also cautioned that US office properties “will continue to struggle” in the short term with low post-Covid utilization.
Kelly has been driving DWS’ expansion into alternatives since being appointed in 2022 from Blackstone Inc. Private credit, which is part of that business, remains a key element of the firm’s growth strategy. However, the Frankfurt-based money manager overseeing €111 billion ($120 billion) of assets in its alternatives business is being more selective on where and how it’s lending in private credit.
Kelly said surplus cash flows, stronger claims to the underlying assets, comprehensive lender protections and reduced interest-rate sensitivity can all offer a shield against volatility and loss.
As the asset class has grown rapidly, so has competition to lend, he said. And while the firm still sees compelling value in direct lending, it has the most positive view on loans that are first in line to be repaid, and favors lending to firms that hold relatively lower levels of debt.
In terms of its push to market funds to the wealthy, DWS recently agreed to a partnership with investment platform iCapital to allow US-based wealth managers and high-net-worth investors to access DWS Alternatives strategies.
DWS has been targeting the area in a bid to grow its alternatives business, and says the channel will help meet investors’ liquidity needs.
This article was provided by Bloomberg News.