A flicker of life in the capital markets

The launch of a UK student housing-backed bond shows that capital markets distribution remains an option, but only in certain cases.

To misquote Mark Twain, reports of the death of European CMBS have been exaggerated, but not greatly.

Although there was a faltering recovery in the CMBS market from around 2012, there has been a limited volume of European commercial property-level financing done through the public issue of bonds. Lenders have typically opted to distribute loans through the more competitive syndication market.

However, late last week, Canadian real estate giant Brookfield priced a £215 million (€264 million) bond backed by a portfolio of 13 UK student accommodation blocks, in a deal dubbed Student Finance PLC.

The deal does not appear to be technically a CMBS, but rather a senior secured bond. It has facets of a CMBS, with income from a loan secured by the properties funding payments to the notes. In addition, S&P has rated it – at BBB – under its CMBS criteria. However, the deal has a single tranche and is not strictly a securitisation.

Technicalities aside, the reason Student Finance is significant is because it is a rare example of the capital markets being tapped to finance a European real estate portfolio. In the US, billions of dollars of CRE loans are routinely funnelled through the CMBS market each year. But in Europe, a similar market has never really taken off. Volatility in the bond markets has meant that most lenders have relied on syndication.

Bank of America Merrill Lynch gamely issued two public CMBS deals secured by German property portfolios in H1 2016, although since then, capital markets solutions for European real estate have been used predominantly in private deals. Last September, Barclays securitised £2.43 billion of UK property loans, and although some junior tranches were reported to have traded, the bulk of the notes were understood to have been retained for treasury management purposes.

There are plenty of people in the industry who would like to see the capital markets become more of an option for those financing real estate. Many continue to root for a genuine revival of CMBS this side of the Atlantic.

Capital markets spreads have tightened in recent months, making the market more viable on paper. The Student Finance deal is understood to have priced at 185 basis points over gilts, which some view as fairly competitive.

The Brookfield deal shows that public issuance can work as a financing tool in select cases. There is still investor demand out there, despite the lack of product which has been offered. Orders for Student Finance are reported to have been close to £450 million. It is unclear at this stage why Brookfield decided to go down this route, but the fact that it did is itself interesting.

Those hoping to see a genuine revival of European CMBS (or CMBS-like instruments) should not get too excited. Most real estate lenders remain focussed on writing loans and syndicating them. In most cases, that is the most obvious route. Only sporadic capital markets issuance is likely, probably for more complex property deals which tend to suit bond buyers. But even ad hoc issuance on the capital markets keeps it alive as an option.