EUROPE – Real estate debt fund managers this week rejected suggestions they were part of a ‘shadow banking' industry slated for new regulation.

Earlier this week the Financial Stability Board (FSB), the global body that co-ordinates national financial regulation, announced that it planned to regulate non-bank lenders against potential systemic risks created by their credit operations. Specifically, the FSB suggested potential new regulations would require non-bank institutions collectively worth $67bn (€52bn) to hold sufficient capital to cover losses and enough liquid assets to cover redemptions.

Yet debt fund managers told the Association of the Luxembourg Fund Industry (ALFI) conference in Luxembourg this week they posed no systemic risk – and that, conversely, they created an appropriate framework to meet unmet demand for real estate finance.

Responding to the FSB's singling out of money-market funds, Signa management board member Michael Morgenroth said: "Debt funds are not shadow banking. I can't see any negative impact on the financial system at all and they’re not comparable with money-market funds, where it's mainly deposits being invested."

He added: "Not only the funds but also the investors are regulated because they’re mostly institutional."

Morgenroth pointed out that bank funding for real estate in the German market had fallen "dramatically" from between 80-100% in recent years. “In the past there was no need for alternative lenders. Now we have the need but we can't fill the gap," he said. "At the same time, for investors, debt has to come in a bond shape."

There was a panel consensus that commercial mortgage-backed securities (CMBS) would not return to the European market in the short term. None of the panellists referred to CMBS guidelines published last week by the CRE Finance Council in a bid to kickstart a market largely shunned by investors since the financial crisis.

Etienne Wagner
, AEW Europe's head of compliance, insisted CMBS were "not a solution". "It's a dead market, with a lack of transparency and a lack of confidence. We need to find another solution, and to find it in non-bank lenders."

Morgenroth said he expected to see more senior debt funds, possibly with banks servicing deals under a new business model. But he did not rule out the re-emergence of CMBS.
"Mezzanine funds can't be the solution for the whole refinancing issue – but neither can senior debt funds," said Morgenroth. "In a few years we'll have to come back to some form of securitisation. It’s just that CMBS structures are not as efficient as they need to be."