CMBS touch paper catches

Deutsche Bank deals show investors will accept more complex issues, writes David Hatcher

Europe’s CMBS market is finding its feet as deals become gradually more complex and interest builds across new jurisdictions.

With volumes of just over €3bn so far this year, the 2014 total will certainly be well below last year’s €8bn, but that figure was boosted by four jumbo German refinancings of loans secured on multi-family housing.

Bhavesh Patel, head of CRE distribution and underwriting at Deutsche Bank, says the recovery “is picking up momentum”.

DB’s two most recent deals have set precedents. Its €250m DECO 2014 Tulip, priced at the end of September, was the first post-crisis CMBS with Dutch collateral, and perhaps most importantly, shows multi-borrower deals are possible.

DB quickly followed this with a £750m CMBS secured against Westfield Stratford City shopping centre in east London, with Crédit Agricole. The deal had been pulled in August due to investors’ concerns that the banks were not retaining 5% of the notes, but its success this time proved that “single-tranche deals do not require a retention –
DB was right,” says Conor Downey, real estate partner at Paul Hastings.

“In a strange way what happened was good news for the market because investors queried it, accepted it and now it’s possible to show that analysis by major institutions has agreed with this conclusion.”

Patel says the deal was first pulled because “a combination of this being new to people and people being on vacation when it needed sign-off, compliance and legal scrutiny in a timely manner, was the problem”.

More volume and velocity

The consensus is that deals closed so far this year have paved the way for a greater number in 2015. “We expect to see more volume, velocity and number of deals next year than we did this year and transaction sizes will increase,” says Patel.

“I think we are going to see CMBS deals with collateral from jurisdictions we haven’t seen so far. I can see a couple of southern European or peripheral jurisdictions come out with CMBS and maybe a little further down the pipe multi-jurisdictional CMBS.”

REC 10.14. p11 tableTim Rosenberg, EMEA head of CRE loan origination for Bank of America Merrill Lynch, says deals can have one degree of complexity relating to their jurisdiction, type of product or who the sponsor is.

“You are likely to see, within reasonable limits, deals with one degree of complexity. For example, you could have a single borrower with properties across northern Europe that had built up large logistics positions, or with multiple borrowers with comparable portfolios in perhaps France or Italy. Less likely in the near term is a repeat of pre-crisis structures where multiple degrees of complexity are put together.”

Investors’ trust is returning gradually, despite many having been burnt by pre-crisis deals, with DB’s recent CMBS having been oversubscribed.

“If you look at cap rates, equity going into deals and their simplicity, it’s very different to what they bought in 2006-07,” Patel adds. “Investors find CMBS provides a better yield than other ABS such as RMBS, which maybe return significantly less margin on AAA-rated tranches.

“With interest rates at historic lows, even small increases in margin, such as 20 or 30bps can be a significant portion of the total return for investors.”

Europe is a long way off the possible $90bn volume the US may see in 2014. But in recent months the touch paper seems to have been lit and 2015 could be a year of increased activity.