Ahead of the curve: Effects of risk management practices of commercial real estate debt funds on loan performance

In recent years, there have been unexpected but not unprecedented global crises that had significant impacts on commercial property markets. This raised the question whether the commercial real estate (CRE) industry had learnt its lessons from such events and had built capacities to better withstand or to more quickly recover from economic crises. Based on the author’s DBA thesis recently submitted to SDA Bocconi, this conference paper casts its spotlight on a research field so far largely neglected in academic literature. The focus lies on the alternative lending space, more specifically CRE debt funds that rose to prominence in the aftermath of the Global Financial Crisis. Not being subject to strict regulatory supervision, debt funds tend to invest in asset classes, geographic regions and capital structures from which traditional financial institutions withdrew. Scientific research on CRE debt funds appeared even more timely and urgent, given their significant share in commercial property markets and the risks associated with regulatory arbitrage. By exploring whether debt funds were able to weather the storm of economic downturns by foresightedly adopting effective loan risk management procedures and processes, this research study proposed a novel research area. Grounded theory was selected as research design. For the conceptualisation and verification of an integrated theory, the author followed the three-step analytical progress of induction, abduction and deduction. In line with triangulation of data collection methods, semi-structured expert interviews, literature review and observation were combined. The research findings substantiated the assumed causal mechanism between loan risk management of CRE debt funds and loan performance. Multi-causality was recognised but with the caveat that it were precisely macroeconomic developments, the impact assessments and mitigation of which were among the core tasks of risk management. The effectiveness of risk management depended on various organisational and operational factors, which were interlinked and mutually dependent. These factors included corporate structures, processes and cultures as well as interorganisational relationships, and not at least resources and infrastructure provided to the responsible units. Although the macroeconomic impacts of debt funds’ loan performance lied beyond the scope of the research study, relevant analytical reflections were included due to their significance. Accordingly, these reflections on more systemic impacts of debt funds’ loan performance on the broader economic context will be presented as brief excursus.