Moody’s Expects Faster Decline in EMEA CMBS Performance
Ratings firm sees no signs of a slowdown in the pace of performance deterioration in the EMEA commercial real estate loan universe in the second quarter.
Excerpted from EMEA CMBS Q2 2009: Surveillance Review
The performance of commercial mortgage-backed securities (CMBS) and multi-family transactions in Europe, the Middle East and Africa (EMEA) exhibited further deterioration during Q2 2009. The rating trend of EMEA CMBS in Q2 2009 was significantly negative, with many transactions experiencing multiple notch downgrades, driven mostly by loan performance-related concerns.
Property values decreased further, driven by further increasing property yields and weaker occupational markets. Although Moody’s notes that towards the end of Q2 2009, the yield widening for prime UK commercial properties with beneficial lease profiles slowed down to some extent, the negative commercial property market environment combined with the still limited amount of capital in the market available for commercial real estate investments is putting increasing pressure on securitised loans.
“The number of transactions that experienced adverse events continued to rise during Q2 2009,” says Lifang Chen, a Moody’s Senior Associate and co-author of the report. “The cumulative number of loans on the respective servicer’s watchlists, in default and/or in special servicing continued to increase at a fast pace during the quarter. Meanwhile, the performance of loans was negatively impacted by both the sustained pressure on property values and declining property cash flows as more tenants had difficulties in making rental payments, especially in the retail sector. In addition, the occupational markets showed further signs of weakening as rental values fell and vacancy levels increased in many markets.”
Moody’s expects the deterioration in EMEA CMBS loan performance to accelerate further over the coming months.
“In Moody’s view, the prevalent factor in performance deterioration will be the failure of borrowers to refinance loans with upcoming maturity amid the significant property value declines experienced and the current lack of available financing in most commercial real estate markets,” says Deniz Yegenaga, a Moody’s Associate Analyst. “Even if commercial real estate lending and investment markets recover from their current state, most loans will be highly levered at maturity unless property values recover substantially, which Moody’s does not expect to happen in the near- to medium-term.”
In addition to increased refinancing risk, Moody’s cautions that weaker occupational markets and adverse tenant performance will also result in more loans suffering payment defaults during their term, resulting in further increasing delinquency rates throughout EMEA CMBS transactions over the coming quarters.
“In light of the recent performance of EMEA commercial property markets and the near- to medium-term outlook for future property value developments, principal losses on EMEA CMBS loans are inevitable,” says Ms. Yegenaga. In Moody’s view, due to the expected enforcement timing, which is also driven by the strategy of special servicers, losses on EMEA CMBS transactions will occur in most cases towards the mid to end of the respective transaction term. However, Moody’s expects that first losses will be allocated to certain transactions over the course of the next few quarters. “These losses will relate to defaulted loans for which the servicer and other relevant parties see limited scope for property management and will instead pursue an immediate sale of the mortgaged properties,” adds Ms. Chen.
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