Demand is there, but lack of supply shuts off CMBS tap

Last year the European real estate securitisation market looked set to finally catch fire as new CMBS financings tripled, to 10 deals totalling over €8bn. Yet the momentum has not continued into 2014, with no deals in the first quarter. So what is holding things back?

At a Commercial Real Estate Finance Council Europe seminar in London on 5 March, it was plain that CMBS is still a tainted product in the eyes of at least some international bond investors.

One ABS portfolio manager said that some CMBS bonds that sold well last year, like Intu’s, were not marketed with a CMBS tag: “If they had been, certain investors would not have been interested.”

Others are, however. US investors in particular ‘get’ the product, he said. Clive Bull, Deutsche Bank’s head of commercial real estate loan structuring, said his bank’s experience is that “people are flying into London saying: ‘I want to buy bonds and have €200m-300m to invest’.”

Both agreed with Lee Galloway, a senior vice-president at international bond investor Pimco, who said lack of product, rather than  lack of investors, is a far more significant reason for the thin market now.

Last year, of the €8bn issued, over half was refinancings of German multi-family housing portfolios. By contrast, this year only €500m of such assets are due for refinancing. Andrew Petersen, practice area leader, finance, at the event’s host, law firm K&L Gates, asked the panel: “Can CMBS survive without German multi-family collateral?”

Bull said one approach was to target single-borrower loans in other property sectors big enough that they would have to be clubbed. “Clubs can be difficult because you move at the speed of the slowest lender and get the lowest denominator covenants. We can quote rates that are competitive to clubs,” he said Yet big loans are thin on the ground and fiercely competed for when they come up.

Galloway asked: “Is CMBS chasing its tail, going for assets it’ll never get? Should it target more credit-intensive, secondary assets and investors be paid for that?” Bull said Deutsche Bank was now happy to structure deals on less than prime collateral. “A year ago, our concern was ‘are there enough investors?’ So we made loans on collateral no one will have concerns about, or German multi-family with its rock-solid cashflow. The focus on high-quality collateral was a reaction to nervousness about whether we could distribute and at what price.

Secondary collateral acceptable

“That concern has disappeared and we’d be happy to do good-quality, secondary collateral that people are going to ask due diligence questions about.”

Like a handful of other banks, DB tried  to get round the shortage of large, single-borrower deals by assembling a pooled deal by warehousing smaller loans, but had not found it easy to find the right opportunities.

Getting a rating for more complex, conduit deals secured on less than prime-quality assets is another hurdle for the embryonic CMBS market. Rating agencies already take longer to rate new deals, as they are now highly regulated, and panellists wondered what such a deal would look like.

Meanwhile, investors have sought to fill allocations by buying privately placed, unrated bonds. Marco Rampin, BNP Paribas’s head of real estate capital markets, was “surprised by the demand” when his team placed a €135m loan to Italian REIT Immobiliare Grande Distribuzione early this year. Pimco took most of the £260m, unrated Debussy CMBS.

“There is significant demand for privately placed deals, but it’s second best compared to a rated deal,” Bull said. “So I think it’s a temporary phenomenon if we can get the CMBS product rolling.” Galloway added: “We need more banks to take more risk,” but without German residential or corporate deals he was sceptical about the market beating last year’s €8bn of new issuance “The opportunity is there for originators to originate deals,” according to the ABS portfolio manager.

One area of opportunity, said Bull, is big, non-performing loan portfolio work-outs that will yield new collateral. “We are starting to see that in Ireland and Spain. CMBS can be an attractive and competitive lender and will get its share of the additional loan demand.”