Demand for Traditional European CMBS Virtually Non-Existent
Moody’s expects European CMBS issuance to remain slow in second half of 2009 as weak performance of loans accelerates.
Excerpts from H1 2009 Review and H2 Outlook EMEA CMBS
Issuance volumes in H1 2009 in the Europe, Middle East and Africa (EMEA) commercial mortgage-backed securities (CMBS) and multi-family market were well above the full-year total for 2008. This was mainly driven by three transactions,amounting to €11.4 billion of the total issuance volume of €14.7 billion for H1 2009. Total issuance volume in 2008 was €6.3 billion.
Irrespective of the volume increase compared to last year’s levels, Moody’s notes that most of the CMBS transactions were retained and investor demand for traditional EMEA CMBS remained virtually non-existent. Moody’s notes that there is demand for credit-tenant-lease CMBS and developing demand for single-loan transactions.
There are two main reasons for the low open market issuance volume. Firstly, there have been capital market-wide adjustments of risk premiums, which make new issuance uneconomical for originators and/or borrowers so that supply decreased dramatically.
Another reason for the low open market CMBS issuance volumes is weak investor sentiment given the ongoing turmoil in the capital markets, which has a direct impact on the demand for CMBS. More specifically for CMBS, there are ongoing concerns about the economies and real estate markets in EMEA, dampening investor demand for this asset class further.
Another aspect affecting investor sentiment negatively is headline risk. Negative factors like property value declines and tenant defaults affect commercial real estate loans in general and cause additional headline risk for concentrated CMBS transactions.
Moody’s expects the weak performance of commercial real estate loans to accelerate.
The refinancing exposure in EMEA CMBS is moderate in 2009, but the volumes increase strongly over the next five years. Moreover, there are high volumes of commercial real estate loans to be refinanced on bank’s balance sheets. The overall reluctance in the market to allocate sufficient capital to fund commercial real estate loans combined with significant value declines makes refinancing risk one of the key performance drivers of outstanding commercial real estate loans and CMBS.
Moody’s expects that the weak real estate markets will continue to impact CMBS ratings. Hereby, older vintage CMBS are expected to outperform more recent vintages as the former benefit from a cushion in the current downturn to absorb value declines due to property value increases until 2007.
For the end of H2 2009 and 2010, Moody’s expects that some tentative signs of stabilisation in the UK prime property investment market will start to emerge. Such stabilisation should, together with the prospects of an economic recovery, improve the outlook for commercial real estate investments, which in turn could re-open the still subdued lending market.
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