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We believe attractive yields and spreads, reduced cyclical risks, and an expanding opportunity set may be reasons to consider real estate debt from a tactical perspective.
The potential for income, favorable risk-adjusted returns, and diversification are features that justify consideration for a strategic allocation to private real estate debt, in our view. Yet we believe that there are also reasons to consider the asset class from a tactical perspective. These include potentially attractive yields and spreads; reduced cyclical risks; and an expanding opportunity set.
Yields and Spreads: Over the past 30 years, yields on private commercial real estate (CRE) debt have tracked those on long-term A-rated corporate bonds (see Exhibit). In the wake of the Federal Reserve’s 2022-23 tightening campaign, yields on both instruments rose to their highest levels since 2010. However, private CRE lending rates increased further, opening a spread only exceeded during the Great Financial Crisis (GFC). In our view, elevated yields and spreads buttress the absolute and relative case for private CRE credit as a source of potential income and total return.
Sources: ACLI (CRE Debt); Moody’s (A-rated Bonds); DWS (calculations). As of June 2024. Past performance is not a guarantee of future results.
Reduced Cyclical Risks: The recent correction has reduced real estate values by 16%.[1] In our view, stabilizing interest rates, coupled with reduced supply, have laid the foundation for a new cycle, characterized by healthy fundamentals and moderate appreciation. Rising cash flows and values improve borrowers’ capacity to service and repay debts, reducing default risks.
Expanding Opportunity Set: We believe that loan maturities and reviving property sales, amid a pullback from banks, will create lending opportunities over the next several years. Just under half of the $5.9 trillion of outstanding mortgage debt is scheduled to mature through 2028.[2] In some cases, debt may be written off, extended, or replaced with equity, but much of it will require refinancing. Moreover, although property sales were muted through the third quarter of 2024, we believe that they will pick up as real estate values recover, stimulating demand for new financing.[3]
This wall of demand may arrive at a time when banks (which hold 51% of outstanding mortgage debt) are under investor and regulatory pressure to curb their real estate exposure.[4] In particular, small and medium-sized institutions (accounting for about 42% of the banking system but 74% of its CRE lending) hold record levels of CRE loans on their balance sheets (23% of total assets, up from 9% 30 years ago).[5] We believe that any effort to pare this exposure could create considerable origination and acquisition opportunities for other lenders, on more favorable terms (including yield and credit protections).
From a long-term perspective, private CRE debt has exhibited qualities — income, risk-adjusted returns, and diversification potential — that may, for many investors, justify a strategic portfolio allocation. Moreover, current conditions reinforce the case for investing in the asset class, in our view. Yields are elevated, both on an absolute (compared with history) and a relative (compared with other debt instruments) basis.[6] The prospect of healthy fundamentals and recovering asset values mitigate the credit risks that have already been relatively limited for core loans over the long-term[7] Finally, we believe that debt maturities and a rising pace of transactions, coupled with a pullback from banks, will create abundant opportunities to acquire and originate loans on terms that are favorable for investors.
NCREIF. As of September 2024.
Federal Reserve (outstanding mortgage debt); Mortgage Bankers Association (maturities). As of June 2024.
MSCI (transactions); Mortgage Bankers Association (originations). As of September 2024.
Federal Reserve. As of June 2024.
FDIC; DWS calculations. As of June 2024.
ACLI (CRE lending rates); Moody’s (A-rated corporate bonds). As of June 2024.
ACLI (delinquencies); FDIC (bank net charge-offs); Giliberto-Levy Commercial Mortgage Performance Index (credit loss). As of September 2024.
For institutional use and registered representative use only. Not for public viewing or distribution.
Past performance is not a guarantee of future results.
Diversification neither assures a profit nor guarantee against loss.
For North America:
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas, Inc. and RREEF America L.L.C., which offer advisory services.
This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for DWS or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither DWS nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the DWS, the Issuer or any office, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
The views expressed in this document constitute DWS Group’s judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer.
Investments are subject to risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time.
Private Credit/Debt risks: All investments involve risk, including possible loss of principal. Private Credit, Direct Lending investments are “private” and may not be appropriate or available for retail investors in the U.S. Investments in Private Credit are subject to various risks including but not limited to market risk, general economic and market conditions, economic recession risk, inflation/deflation risk, counterparty risk, prepayment and extension risk, debt securities, default risk, secured debt, second lien and subordinated loans, private investment risk, PIK interest risk, direct lending risk, interest rate risk, Illiquid portfolio investments, valuation risk, high yield debt, and reinvestment risk.
Real Estate risk: Investing in Real Estate is subject to various risks, including but not limited to the following: Adverse changes in economic conditions including changes in the financial conditions of tenants, buyer and sellers, changes in the availability of debt financing, changes in interest rates, real estate tax rates and other operating expenses; Adverse changes in law and regulation including environmental laws and regulations, zoning laws and other governmental rules and fiscal policies; Environmental claims arising in respect of real estate acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; changes in the relative popularity of property types and locations; risks and operating problems arising out of the presence of certain construction materials; and currency/exchange rate risks where the investments are denominated in a currency other than the investor’s home currency.
An investment in real assets involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.
For Investors in Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the securities described herein and any representation to the contrary is an offence. This document is intended for discussion purposes only and does not create any legally binding obligations on the part of DWS Group. Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the final documentation relating to the transaction you are considering, and not the document contained herein. DWS Group is not acting as your financial adviser or in any other fiduciary capacity with respect to any transaction presented to you. Any transaction(s) or products(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand such transaction(s) and have made an independent assessment of the appropriateness of the transaction(s) in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DWS Group, you do so in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates, and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document, in whole or in part, without our express written permission.
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War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investment.
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Carefully consider the fund's investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the fund's prospectus. To obtain a mutual fund summary prospectus, if available, or prospectus, call (800) 728-3337 or download one here. To obtain an ETF prospectus call (844) 851-4255 or download one here. To obtain the RREEF Property Trust prospectus, download one here. Read the prospectus carefully before investing.
Investing involves risk including loss of principal. Stocks may decline in value. Bond investments are subject to interest-rate, credit, liquidity, and market risks to varying degrees. When interest rates rise, bond prices generally fall. You cannot invest directly in an index. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Foreign investing involves greater and different risks than investing in US companies, including currency fluctuations, less liquidity, less developed or less efficient trading markets, lack of comprehensive company information, political instability and differing auditing and legal standards. Emerging markets tend to be more volatile and less liquid than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. Funds investing in a single industry, country or in a limited geographic region generally are more volatile than more diversified funds. Performance of a fund may diverge from that of an underlying index due to operating expenses, transaction costs, cash flows, use of sampling strategies or operational inefficiencies. There are additional risks associated with investing in high-yield bonds, aggressive growth stocks, non-diversified/concentrated funds and small- and mid-cap stocks which are more fully explained in the prospectuses, as applicable. An investment in any fund should be considered only as a supplement to a complete investment program for those investors willing to accept the risks associated with that fund. Please read the applicable prospectus for more information.
Shares of exchange traded funds (ETFs) are bought and sold at market price (not NAV) throughout the day on the Fund’s Primary Listing Exchange. There can be no assurance that an active trading market for shares of a fund will develop or be maintained. Transactions in shares of ETFs will result in Brokerage commissions and will generate tax consequences. There are risks associated with investing, including possible loss of principal.
Shares of ETFs may be sold throughout the day on the exchange through any brokerage account. However, shares may only be purchased and redeemed directly from the funds by authorized participants in very large creation/redemption units. There is no assurance that an active trading market for shares of an ETF will develop or be maintained.
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Xtrackers ETFs ("ETFs") are managed by DBX Advisors LLC (the "Adviser"), and distributed by ALPS Distributors, Inc. (“ALPS”). The Adviser is a subsidiary of DWS Group GmbH & Co. KGaA, and is not affiliated with ALPS.
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This website is intended to be a general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, plan feature or other such purpose. Your use of this website indicates that you agree with the intended purpose. Prior to making any investment or financial decision, you should seek individualized advice from a personal financial, tax, and other professionals who are able to provide advice in the context of your particular financial situation.
DWS does not render legal or tax advice, and the information contained in this communication should not be regarded as such. The comments, opinions and estimates contained herein are based on or derived from publicly available information from sources that we believe to be reliable. We do not guarantee their accuracy. This material is for informational purposes only and sets forth our views as of this date. The underlying assumptions and these views are subject to change without notice.
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War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.
Past performance is not indicative of future returns. No assurance can be made that investment objectives will be achieved.
To obtain a summary prospectus, if available, or prospectus, for Institutional money market funds distributed by DWS Distributors, Inc., download one now or call Institutional Investor Services at (800) 730-1313, Monday through Friday, 8:30 am to 6:00 pm ET. We advise you to carefully consider the product's objectives, risks, charges and expenses before investing. The summary prospectus and prospectus contain this information and other important information about the investment product, including management fees and expenses. Please read the prospectus carefully before you invest or send money.
Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.
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The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas, Inc. and RREEF America L.L.C., which offer advisory services.
R-070495-4 (7/25)
