Many people would like the capital markets to re-open for real estate, but the question is: in what form?
In the US, the CMBS market has started to come back, leading to hopes that Europe will follow. Banks including Deutsche Bank, BNP Paribas, UBS and Credit Suisse are said to have teams working on potential structures.
The market would appear to be playing into their hands, as the squeeze on bank liquidity for larger property deals has got worse. If borrowers cannot find bank finance, the appeal of competitively-priced funding in public markets may outweigh any reluctance to give up the prospect of a close relationship with a bank.
Meanwhile, spreads on secondary European CMBS have come down and spreads on any clean, new issue should be much lower than for secondary notes.
Yet much as they would like it, few bankers, let alone other experts here, are under the illusion that Europe must follow the US. There are significant differences between the markets, the most important being the investor base for the bonds.
In the US it is much deeper. In Europe, the ‘old’ investors have gone and banks are pinning their hopes on the ‘real money investors’ – pension funds and insurers.
In the past, the banking mentality tended to be that if something is priced correctly, someone will buy it. There was more than a hint of this still on show from bankers on a panel at a recent seminar on what has been dubbed ‘CMBS 2.0’.
But if this were to be the starting point again this time around, it would surely be a huge mistake. The structures will need to be designed expressly for investors, who will otherwise be reluctant to even consider a product with the same name and associations of loss of control.
During the growth period of CMBS, elements crept in that were designed for issuing banks rather than investors: pools with dozens of loans with different loan triggers were introduced; banks encouraged borrowers to take out long-dated swaps; and junior debt became common outside the securitisations, making control much harder to work out later.
Banks also introduced X Class notes as a way of continuing to earn fees on the deals they structured, with priority on interest over note holders, even when deals defaulted. It is ironic that banks were often also on the other side, as investors.
Investors’ desire for more control over their investments is a legacy of the fallout from the credit crunch and by no means only applies to structured finance investing. In property, it has also rippled through the direct market, where large equity investors now have a strong preference not to invest via funds.
When it comes to debt, pension funds and insurance groups are saying they have a preference for buying whole loans, where they have more control, rather than bonds. The structure of any new real estate capital markets product will have to overcome this.