A nascent recovery in European CMBS is finally expected to emerge this year, with as many as three German multi-family securitisations as well as a new £400m Chiswick Park transaction expected to come to market before the summer in a year which could see as much as €15bn this year.
Deutsche Bank’s CMBS analyst team has improved on last November’s optimistic forecast of between €5bn and €10bn, by Brookland Partners’ founder Nassar Hussain, to suggest in a note published on Friday that as much as €15bn of new transactions could be sold this year.
Demand for new issuance is the result of a need for debt investors in maturing CMBS transactions to recycle capital when deals naturally run off or refinance through the broader lending markets, as well as in a gradually emerging relative value play for some specific CMBS product.
“We always thought the CMBS market would gradually return in one form or another,” wrote Deutsche Bank’s Paul Heaton, “but in speaking to clients over the last few months we have been surprised (to the upside) in terms of the appetite for the right CMBS today.”
Deutsche Bank identifies the CMBS market returning in four distinct forms.
German multi-family CMBS leads the way
The first is led by German multi-family CMBS, which the research team suggests could prompt between €5bn and €7bn in new issuance this year, including in multi-family transactions with collateral from the Netherlands, Sweden and France.
Last September’s Florentia agency CMBS by Vitus was the first such German multi-family securitisation in five years. Since then the economics for banks and the relative pricing for bond investors have improved.
Gagfah is expected to refinance part of its maturing €2.08bn of securitised debt with a circa €625m CMBS, expected to come to market this year by Goldman Sachs and Uni-Credit, while Bank of America Merrill Lynch is expected to bring to market a €1.06bn CMBS for its recently refinanced Woba portfolio.
In addition, Deutsche Annington is understood to be contemplating an early mini-GRAND CMBS, as part of next year’s annual refinancing target ahead of this year’s initial public offering, with the Terra Firma-owned German residential expected to float later this summer in a process managed by Morgan Stanley and JP Morgan.
“German multifamily CMBS spreads offer attractive yields compared to competing products such as US CMBS and UK Prime RMBS,” wrote Mark Nichol, a CMBS analyst at BAML.
At the AAA rating level, a new five-year German multi-family CMBS could now price around 120 basis points over EURIBOR, compared with 48 bps for AAA US CMBS notes, while German multi-family BBBs are now around 400 bps, compared to 300 bps for 10-year BBB US CMBS.
Nichol explained in his note: “The main reason for the differences in pricing between these competing products is not differences in credit risk but rather the larger investor base in US CMBS and UK RMBS compared to German multifamily CMBS, in our view.
“We believe this may offer an attractive opportunity for US CMBS and RMBS investors to pick up additional yield in a similar product.
“As RMBS investors in Europe continue to be starved of new issuance and yield some may become willing to consider German multifamily CMBS as a close substitute that is likely to offer greater new supply and yield this year, in our expectation.”
From 2004 to 2012 issuance of German multifamily CMBS totalled €22.0bn, according to BAML. Of this total loan losses have totalled 0.6% at just €142.7m from four loans in multi-sponsor transactions – where defaults have occurred, the recovery rate has been 94.3%, according to BAML.
Up to €3bn in single-borrower CMBS
Deutsche Bank’s second form is in single-borrower CMBS, which could deliver between €2bn and €3bn this year. Deutsche Bank has re-won the mandate to refinance Chiswick Park which will see a second new issuance, at £400m, for the second time in two years.
Heaton wrote: “We think lowly levered (say 60-65% LTV) CMBS on reasonable quality assets operated by strong sponsors (we would contend Chiswick Park and Merry Hill fit firmly into this category), would offer pickup versus RMBS, for example.
“We also think the subordinate notes would be cheap versus front pay legacy CMBS, likely offering a comparable or higher return, but for a lower LTV (say 65% vs 70-80% LTV in legacy CMBS).”
Long-dated fixed sterling issuance, akin to the recent Intu Finance £800m two-tranche bond, illustrates the demand for long-dated product, with Deutsche Bank forecasting between €3bn and €5bn this year.
Heaton wrote: “The upsized INTU Finance deal, launched in March, shows there exists appetite in the long-dated fixed sterling market for property related debt instruments, with the 2023 tranche pricing 210bps over the relevant Gilt, and the 2028 tranche 205bps over. We understand both tranches subsequently tightened significantly (to less than 190bps) in secondary trading.”
Finally, the second phase of the recovery could manifest through a gradual return of multi-borrwer loans – “by this we mean three or four loans”, writes Heaton, adding “we think the re-emergence of prepayment risk in single-borrower CMBS may act as a catalyst for multi-borrower issuance”.
The potential €15bn worth of new European CMBS issuance “will come from a variety of originators, with issuance designed to meet investor demand in terms of both fixed and floating rate.
“It is our conviction any rebirth of the new issue market will offer significant relative value for a wide variety of investors, depending on the position they choose to take in the capital structure,” concluded Heaton.
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