2021 outlook: CMBS likely to be issued against a greater array of property types

Rating agency Moody’s predicts next year’s European CMBS issuance will have greater exposure to assets including multifamily residential and specialised properties.

As property investors look for alternatives to pandemic-hit sectors such as retail and offices, loans written against a wider range of property types in Europe are likely to be securitised in 2021, according to a new outlook report by rating agency Moody’s.

The logistics sector will continue to be seen a safe haven for investors, the report found. But the range of property sectors within European commercial mortgage-backed securities issuance will expand to include UK multifamily residential assets and specialised properties, such as data centres, as some banks view specialised assets as riskier prospects due to limited alternative use.

Moody’s also expects to see an increase in single-tenanted buildings in CMBS deals, as companies with strong credit turn towards their real estate portfolios as a source of liquidity.

Here is a rundown of some of the report’s other findings.

A securitisation rebound is expected
European CMBS issuance volumes will recover in 2021 but will remain below the 2019 peak, as the macroeconomic fallout from the covid-19 crisis continues, Moody’s predicts. Issuance volumes dropped from €5.8 billion in 2019 to €1.8 billion in 2020, according to the rating agency. However, it warned, issuance could be erratic because of the volatility in spreads, which are sensitive to conditions in the broader capital markets.

Leverage will remain moderate
Moody’s expects European CMBS to continue to be issued against moderately leveraged loans in 2021. The agency expects loan-to-value ratios to remain within the 55-65 percent range, due to conservative underwriting and lower property valuations.

Performance will deteriorate for deals with high retail and leisure exposure
Term default risk for retail and leisure properties is likely to increase because of lower rental collection rates. For office, logistics and residential loans, the risk is likely to remain stable even though tenant demand for offices will decline over the next 12 to 18 months due to the shift towards remote working. The logistics sector will continue to outperform, amid strong tenant demand arising from a shift towards online retailing and companies’ focus on shorter supply chains.

More ‘green’ CMBS issuance is likely
Investors are becoming more conscious of the environmental sustainability of properties. Landlords will allocate more capital to retrofit older offices to meet higher sustainability standards, ensuring they comply with regulations while attracting the widest possible tenant base. In January, Goldman Sachs issued Europe’s first ‘green’ CMBS, demonstrating investor demand for notes backed by sustainable properties.

Granular transactions are expected to be issued by non-bank lenders
Securitisation of granular pools consisting of more than 100 loans will remain a lucrative source of liquidity for emerging non-bank lenders. Therefore, further issuance of granular transactions should be expected in 2021.