CMBS recovery may reside in places beyond German housing

Last year saw property debt capital markets starting to recover. The volume of debt issued as CMBS to finance European real estate trebled, albeit off a very low base, from €2.7bn to €8.2bn. The market’s re-opening helped to refinance more than half of a near €10bn spike of German multi-family housing loans that all matured within 12-18 months. Almost all the rest, £4.3bn owed by Deutsche Annington and originally securitised in the GRAND deal, was restructured then also sold in the capital markets as corporate bonds.

Only two to three years ago, this maturing multi-family housing debt had looked like a looming mountain; many had predicted that refinancing it all would be impossible. But in 2014, little German residential debt requires refinancing, a fact contributing to rating agency Standard & Poor’s view that last year’s CMBS issuance jump will be short-lived. S&P says GMF was a fairly easy sell because the property owners are well-funded and can inject new equity and the stable, income-producing assets are exactly what bond buyers want.

The loan servicers, whose world has revolved around CMBS for almost 10 years, latterly through work-outs, aren’t banking on a recovery in deals either, but are seeking other opportunities to sustain and expand their businesses. But are the prospects for a CMBS recovery really so gloomy? The investment banks don’t seem to think so. Following Deutsche Bank’s lead, JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch are said to be rebuilding teams and even conduit programmes.

Last year’s CMBS deals showed that pricing works in relation to competing debt and investors want to buy the bonds, even if it’s not yet clear how deep the investor pool is. With regard to S&P’s view, German housing wasn’t the only collateral for CMBS before the crash and it won’t be in the future. The last CMBS in 2013, Goldman Sachs’ Gallerie, was backed by Italian retail and Blackstone is said to be considering CMBS to finance recent Italian purchases. It has been suggested that banks will consider new CMBS in Italy, and perhaps Spain, partly because regulations there require investors buying syndicated loans to have a banking licence, so CMBS could attract a wider investor base. This seems a sensible reason for considering it.

If banks believe there are investors at the right price they are sure to turn up other property types that could benefit from CMBS finance. One thing that is not helpful is a report on long-term investing published in December, produced by the European Insurance and Occupational Pensions Authority (EIOPA), which suggests even worse capital treatment for CMBS under Solvency II than previously proposed. In a response last week, CREFC Europe and INREV argued that this will cut off one avenue for insurers to invest in property debt, precisely when regulators should be encouraging diversity of finance away from banks to support financial stability.

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