UK – The use of debt in property investment should be regulated more stringently and is too dangerous to be left up to banks or the real estate industry, a UK academic told a real estate seminar in London.
Tony Key, professor of real estate economics at the Cass Business School, presented research showing that highly leveraged and more aggressive real estate strategies failed to produce higher risk-adjusted returns than their debt-free counterparts.
Speaking at the IP Real Estate Awards seminar, Key said: "Aside from US opportunistic funds, which do seem to have done quite well over a long period, none of the more aggressive styles or leveraged strategies has delivered a better return."
Key produced data to argue that not only did leverage in real estate investments increase risk to at least cancel out the extra returns it was likely to produce, but that the use of debt in the market actually increased bid prices on property.
"What should we be learning from this?" he asked. "First of all, that real estate leverage is too dangerous a thing to be left to either the banks or the real estate industry.
"I think, along with the Liikanen report for the European Commission, and comments by Andrew Bailey of the Prudential Regulatory Authority, that Basel III risk-based weightings and modelling doesn't work – you've got to have something a lot cruder and a lot more binding on LTV limits."
Furthermore, fund structures needed to offer investors what they wanted, and be clear about that.
"What most investors probably want is what it says on the tin – moderate returns and risk with beta to the market," he said.
"But we haven't found a satisfactory way of delivering that, especially in cross-border deals yet."
There was also a need for more education on the implications of debt within an investment, according to Key.
"People should be working a lot harder in telling investors beforehand what the risk of leverage actually is," he said, adding that more work also needed to be done in putting that across.
"We still don't have enough good data on who is actually driving the market pricing cycle with regard to different financing strategies," he said.
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