European CMBS issuance next year is forecast to reach the €15bn mark next year, according to three leading investment bank research teams, which would nearly double the modest rebound in capital markets this year.
The long-awaited recovery in capital market this year has been driven by increasing risk appetite, improvements in the macro economies of Europe and the normalising of bank lending, which analysts predict will continue next year which could mark the return of multi-borrower transactions.
“The bigger picture is clear – banks have started to lend in size against real estate again,” writes Paul Heaton, research analyst at Deutsche Bank, in its 2014 European ABS outlook published yesterday.
Mark Nichol, research analyst at Bank of America Merrill Lynch, in the bank’s European Structured Finance Annual Review, wrote: “We think the pricing disparity that existed post crisis has largely been eliminated and commercial real estate (CRE) debt pricing is now largely efficient with respect to risk, return and tenor, in our view.
“We see fewer ‘mispriced’ assets in the market now and investors looking for higher returns may have to accept higher credit risk or lower liquidity.”
Deutsche Bank forecast that next year’s new issuance “is likely to be high and surprise the market to the upside,” with CMBS investors more likely to focus their attention on new issuance rather than to secondary trading in 2014.
BAML guided that 2014 “could exceed €10bn” adding that issuance of between €10bn and €20bn is a sustainable level of annual deal flow range.
Barclays Capital offered a tighter range, at between €10bn and €15bn, with the additional break-down that the composition of 2014’s annual tally would include €8bn in publicly traded issuance and the balance in privately-placed transactions.
Taking €15bn as the broad consensus between the three research team’s forecasts, next year’s annual CMBS lending tally would reflect a 42% improvement on 2013’s €8.7bn in new issuance over 13 single-borrower transactions.
The net result of this year’s €8.7bn in new issuance and €24.6bn in redemptions of legacy transactions – through a combination of loan maturity, enforcement and early repayments – is European CMBS universe reduced by €16.3bn, or 17.5%, to €77.0bn, according to calculations by BAML.
Deutsche Bank’s analysis further segregates the outstanding CMBS market into the core floating rated issuance sub-sector, isolating a small number of large, bespoke, fixed rate transactions issued prior to the global financial crisis.
Deutsche Bank identified four likely sources of loans which could seek successful capital market exits in 2014:
- jumbo single asset loans, for which securitisation can be more efficient than syndication;
- secondary assets, particularly in the UK where the inflexion point on asset pricing has now passed;
- loans secured by assets in peripheral countries, such as Italy, Spain and Ireland; and
- German multi-family portfolios, albeit at a considerably lower level than in the last two years.
Prior to London Bridge Holdings’ More London sale to St Martins for £1.7bn, as revealed by CoStar News last Saturday, an enlarged refinancing of the wider office, hotel and retail estate by Tower Bridge was expected.
Rothschild was running the refinancing process with both Deutsche Bank and JPMorgan vying for the mandate to originate a fresh £900m senior loan, with both investment banks targeting a CMBS exit.
There was considered by be ample interest in such for such sterling-denominated rated paper, which while now redundant anecdotally illustrates an appetite for big ticket capital market deals.
“For these the CMBS market is a much more practical exit route than syndication,” writes Heaton.” Moreover, the CMBS market is now competitive on a pricing standpoint to the bank market.”
The same can be said, perhaps more surprisingly, for peripheral European real estate markets, such as Italy, Spain and Ireland as exemplified by Goldman Sachs’ €363mn Italian retail CMBS transaction, Gallerie 2013 Srl.
Domestic regulations in Italy and Spain require institutions purchasing syndicated loans to have a banking licence, therefore CMBS transactions effectively deepen the otherwise restricted potential investor base.
In this sub-sector, the outstanding European floating rate CMBS universe shrank by 28.2% to €42.8bn over 2013, according to Deutsche Bank analysis.
“We think the CMBS floating rate market has overshot its equilibrium on the way down,” writes Heaton.
In other words, there is a supply shortage of floating rated European CMBS paper relative to perceived demand. The equilibrium level is in the €50bn to €60bn range, estimates Heaton.
Heaton writes: “If one assumes around €10bn of liquidations of legacy assets takes place in 2014 (a not unreasonable assumption in our view), it becomes clear that without substantial new issuance the floating rate CMBS market risks evolving to such a small size that it ceases to matter.
“We do not believe the demand side of the equation wishes this to happen.. it is our view the supply chain is evolving to meet this demand.”