“The CMBS market has shown itself to be a €5- 10bn new issue market in recent years,” wrote Paul Heaton, director in Deutsche Bank’s ABS Research team, adding that the “significant pipeline” routinely implied by rating agencies and legal firms would dictate where on the spectrum year-end issuance finally lies.
“We have no reason to doubt such a pipeline exists,” explains Heaton, “our doubts reside around the pricing blockages that seem to be preventing it emerging and coming to market.”
Separately, Morgan Stanley has issued a €6bn forecast for next year’s European CMBS issuance while Nomura International is expected to issue its forecast early next week.
CMBS issuance, Heaton argues, is currently restricted to sectors where the other alternatives – such as the banking market, insurance money, corporate bonds or debt funds – does not work well.
“We see no imminent catalyst for this to change… Issuance levels going forward will remain sensitive to spreads – at benchmark AAA levels around 100bps annual issuance has the potential to be in the €10bn area.
“At wider levels, such as those that prevailed in the second half of 2015, issuance will in our view prove challenging.”
Netherlands and Italy were cited by Deutsche Bank as the obvious jurisdictions where the economics of CMBS stack up, due to uncompetitive and thin coverage by domestic banks.
“We have heard that the number of CRE lenders in the Netherlands can be counted on one hand – with several fingers unutilised,” Heaton wrote.
In BAML’s European Structured Finance Annual Review, published on Monday 23 November, research analyst Mark Nichol wrote: “Issuance is likely to continue to come from peripheral European countries more than has historically been the case we think, as these countries may be less advanced in dealing with the stock of NPLs and as a consequence, foreign lenders may be able to compete successfully with domestic banks on new CRE lending.”
In his summary of CMBS issuance in 2015, Heaton wrote: “Started off well, tailed off around June, with minimal activity in the second half,” in what seems to paraphrase Rowan Atkinson’s Blackadder. (In particular, Blackadder’s review of private Baldrick’s attempt at War poetry: “Well, it started badly, tailed off a little in the middle, and the less said about the end, the better. But, apart from that, excellent”).
Returning to CMBS, the first signs of price widening came in June’s Mint hotel deal by JPMorgan, in which the AAAs priced 20 bps wider than the initial pricing talk as reported by Bloomberg. Deutsche Bank’s ABS Research team estimated that the deal was likely to have made a profit of 20bps per annum, before deal costs.
It was in the subsequent five deals during the third quarter – together worth €1.5bn – in which some originators are believed to have slipped into the red on certain transactions. Deutsche Bank estimated that banks’ aggregate losses were in the region of €20-30m.
In particular Goldman Sachs’ £650mn LOGIS 2015-1 transaction priced at a €10-15m loss, estimated Deutsche Bank, which it said “could affect originators’ appetite for this kind of transaction going forward”.
Heaton added: “We suspect this figure is augmented by losses on loans for deals which did not make it to market, but by definition this figure is impossible to estimate.”
On the underlying property market, Heaton observed: “Those looking for signs of the next property downturn can take solace from the elevated basis between current property yields and rates, which is still at historically elevated levels. Those of a more sceptical nature would perhaps point out that most asset classes look cheap compared to rates and bonds.
“We see no catalysts for sharp upward moves in rates, and so large sections of the property market continue to offer value to our mind.
“Where we would perhaps have some reservations are global cities prone to the whims of capital account of the balance of payments, and knock on effects. For example, we think to some extent the inflow of foreign capital into the London Prime market is driven by the UK’s current account deficit.
“Should this dynamic change, we would have concerns capital flight could impact London pricing, with ripple through effects to the rest of the UK property market.”
In BAML’s property market commentary, Nichol observed: “In 2016 we expect commercial property in Europe could experience similar fundamental performance and valuation drivers as in 2015. We still see more upside than downside in CRE in 2016 although less than we saw in 2015.
“The low interest rate environment, attractive investment yields relative to other sectors and quantitative easing in some markets have fuelled capital inflows to commercial property globally.
“We anticipate this weight of capital could continue to put downward pressure on prime and secondary property yields in 2016. Secondary property could experience greater yield compression than prime property as more investors target higher yielding assets.”