Credit Crisis Scaring Off Commercial Real Estate Investors
The jury may still be out on how badly commercial real estate securities will be infected with the residential subprime mortgage bug, but investors appear to be heading for the hills anyway.
The Financial Times reports that issuance of US CMBS fell to $6.3bn in October, down 84% cent from a record $38.5bn in March, according to Commercial Mortgage Alert (subscription required). The decline in CMBS issuance is crucial because such securities have provided an estimated 40 to 60% of financing for new commercial property purchases in recent years, the FT says.
Investors have fled the CMBS market, in part because of worries that riskier lending practices in commercial real estate would lead to higher defaults.
According to Moody’s, loans were made at an average of 118% of the value of commercial properties in the last quarter, the FT says.
RBS Greenwich Capital expects CMBS issuance to fall to $100 billion or less next year, the lowest level since 2004, from an estimated $245 billion in the latest 12-month period, the FT reports. RBS predicts that US commercial property prices will fall 10-15% next year.
In related developments, Moody’s issued a paper discussing its approach to its recently introduced covenant quality assessment matrix for Real Estate Investment Trusts and similar instruments. And Fitch Monday updated its Criteria for Analyzing Capital Adequacy of US Equity REITs.
Research Recap earlier highlighted this topic in a series of reports from CreditSights: Is Commercial Real Estate The Next Subprime?, Commercial Real Estate Risks Less Severe Than Subprime and Commercial Real Estate CDOs Not As Low-Risk As They Seem?
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