European CMBS issuance will reach €5bn next year as investor demand finally recovers from the five consecutive years of stubbornly light deal flow, with the turning point establishing a new normal of between €5bn and €10bn per annum, Bank of America Merrill Lynch predicts.
The ‘new normal’ level of €5bn to 10bn next year and for the foreseeable future would mark a significant pick-up from the €1bn to €3bn of new issuance that was placed each year from 2008 through to 2012.
This year, Europe’s has six new CMBS issuances amounting to €2.5bn in aggregate – comprised of the Tesco £450m credit tenant lease deal, Deutsche Bank’s £210 Merry Hill and €754m Florentia, and RBS’ £463m Isobel Finance transaction. In addition, a €625m privately placed Dutch multifamily CMS called Vesteda Residential Funding II closed in April.
The Utrecht Funding €214.8m CMBS, a refinancing of the Uni-Invest CMBS by TPG and Patron Capital would increase the full calendar year’s issuance to €2.7bn if included.
BAML’s relatively bullish forecast is in line with those offered at last month’s CRE Finance Council autumn conference by Brookland Partners founding partner Nassar Hussain – and chair of the CMBS 2.0.committee – who suggested to delegates that issuance would fall between €5bn and €10bn.
“We expect new CMBS transactions are likely to fit into one of the five categories: multi-family, non-performing loan pools (NPL), credit tenant lease (CTL), trophy assets and REIT/Propco issuance,” wrote Mark Nichol, research analyst at BAML.
BAML’s upbeat forecast, however, contrasts with Barclays Capital’s more unspectacular forecast of between €1bn and €2bn from two and four transactions, including a potential additional Tesco sale-and-leaseback transaction.
“Our short-term outlook is mainly a result of the substantial lead time that is currently needed for the launch of a European CMBS,” wrote Christian Aufsatz, analyst at Barclays Capital.
European CMBS – reasons for optimism
BAML’s explains its thinking by pointing to the convergence on CMBS spreads with loan margins.
“In recent years, margins on CMBS have been higher than those of comparable bank loans, which made financing via CMBS uneconomical for borrowers. This is no longer the case in some jurisdictions,” wrote Nichol.
He continued: “CMBS spreads have tightened significantly while loan margins have widened in countries such as in the UK where senior loan margins rose from broadly 220 bp in 2009 to 300 bp currently.
“Insurance companies may lend at lower rates than banks in the UK but they are mainly focussed on prime quality property, in our observation, which leaves the bulk of borrowers to consider more expensive sources of debt, including CMBS.”
Changes contemplated under Solvency 2 could potentially increase the attractiveness of some types of securitisation products to insurance companies, continued Nichol.
“Regulators may be considering a more favourable treatment for granular real economy assets, infrastructure assets and SMEs while making the capital treatment more consistent between banks and insurers.
“The most likely candidate to qualify as providing funding for ‘real economy assets’ is RMBS, in our view. It is unclear whether any type of CMBS is likely to qualify although we think an argument could be made for GMF CMBS.”
The lack of a dedicated real money investor base continues to pose the biggest obstacle to European CMBS issuance.
“For the past several years potential new investors have been attracted by the roughly 400 bp or more of additional yield European CMBS offers compared to more vanilla ABS and other fixed income products.
“Going forward these same investors may find the 200 bp of additional yield that European CMBS now offers increasingly irresistible if yields on vanilla ABS, RMBS and other fixed income products no longer satisfy return requirements.”
The German multi-family (GMF) sector is expected to be the sector to watch for early new issuance. Gagfah also has confirmed that it is considering issuing a €625m CMBS in the first half of next year, as part of a wider €2.1bn refinancing requirement, while Deutsche Annington is also thought a likely candidate to issue a partial ‘mini-GRAND’ CMBS either next year or in 2014.
Nichol wrote: “The similarities between GMF CMBS and RMBS – stable income from granular pools of thousands of residential occupiers underpinned by German economic growth – make GMF a natural entry point into CMBS for RMBS investors seeking higher yields, in our view.”
European CMBS loan maturities peak next year when €22.8bn of loans is scheduled to mature, with another €8.8bn of overdue loans that have failed to repay at their maturity dates, including €5.1bn in 2012 alone.
Of the €25.7bn of European CMBS loans that have reached their maturity date since 2007, just €3.9bn repaid in full while the other 84.8% defaulted at maturity, according to Fitch Ratings.