Only a handful of lenders have tested the waters of Europe’s CMBS market since the financial crisis, but recent activity suggests real estate securitisation is taking off.
An 18-month hiatus from May 2016 ended with the £347.9 million (€389.3 million) Taurus 2017-2 UK CMBS at the end of 2017, a transaction led by Bank of America Merrill Lynch and secured against a portfolio of ‘last-mile’ logistics properties bought by Blackstone and M7 Real Estate.
Since then, there has been a relatively steady flow of issuance with three transactions closed in 2018 so far and “a pipeline continuing to build”, according to a report from ratings agency DBRS. In mid-May, Goldman Sachs launched Ribbon Finance 2018, a single loan £427.3 million CMBS backed by Holiday Inn hotels in the UK, which promises to be this year’s fourth deal.
A second UK transaction since the CMBS revival will further test pricing levels. In the Taurus 2017-2 UK deal, AAA notes priced at 85 basis points. Another CMBS deal – FROSN-2018 DAC, issued by Citi and Morgan Stanley to securitise debt issued to finance Blackstone’s purchase of Finland’s Sponda property platform, achieved 75bps for its ‘A1’ notes.
“Now is the right moment to do CMBS transactions. In 2016, it would have been much more challenging to find opportunities to securitise in an economical manner,” said Matthias Baltes, head of EMEA commercial real estate structured finance at BAML. “If the pricing difference is positive, the deal is doable.”
Although issuance of European CMBS is still far from volumes seen in the US, the market is following a positive direction, with strong interest from investors – which was demonstrated by the tight pricing of the latest real estate securitisation closed at the time of publication.
In the May transaction – Taurus 2018-1 IT – BAML securitised €341.7 million of debt backed by three loans secured on a portfolio of Italian logistic and retail assets, with a combined pricing of 2.8 percent over three-month Euribor.
The securitisation, sponsored by Blackstone and Partners Group, priced at 100bps over three-month Euribor for its highest-rated tranche ¬– tighter than initial price thoughts for the €224.3 million class ‘A’ tranche, set at 110bps-115bps. Compared with the class ‘A’ margins of Pietra Nera Uno, the first Italian CMBS deal this year comprising an agency transaction undertaken by Blackstone, the pricing of the highest-rated tranche of BAML’s Taurus 2018-1 IT tightened by 15bps. The pricing was wider than the Class A notes in the UK ‘last mile’ deal, reflecting the different jurisdiction.
Lenders issuing securitisations in recent months have generally benefited from tightening pricing, as investors see relative value in CMBS compared with other fixed-income assets, Baltes explained. With all its notes oversubscribed through the CMBS stack for Taurus 2018-1 IT, the rare notes had bullish demand, attracting 28 investors, of which 77.6 percent were asset managers.
“Since 2016, the CMBS investor base is back and clamouring for paper. Investors are definitely out there, we have seen that with the oversubscription levels in the last deals,” said Andrew Petersen, a London-based finance partner with law firm K&L Gates.
One factor that might be revitalising investors’ trust in the current CMBS market is the simplicity of the current securitisations compared with the notes issued before the financial crisis.
“One of the consequences of the global financial crisis is that CMBS arrangers have become more cautious with their underwriting. They pay much more attention to valuations, structures are simpler, issuances are no longer multi-jurisdiction,” said Marco Rampin, head of Europe debt and structured finance at CBRE and former head of real estate securitisation at BNP Paribas.
“We observe today a resurgent debt capital markets investors’ appetite and confidence in the CMBS as an alternative investment instrument to traditional debt. If the underwriting criteria continue showing the characteristics of the ones we see today, I think the CMBS market will build up momentum,” he added.