European CMBS on stream as appetite grows

Bankers are working on at least three new European commercial mortgage-backed securities deals, looking to take advantage of fresh investor appetite for an asset class that was one of the hardest hit by the US subprime crisis.

The deals signal a thawing in the market for CMBS in Europe, which in contrast to the US has seen only a scattering of deals since 2008.

The new pipeline of deals comes as investors, including from the US, are chasing higher yielding assets that have performed well during the crisis. While many of the European property loans contained in the pool that backs CMBS have not repaid on time, the overall default rate on loans in German and UK prime deals is very low.

Of the new deals, at least two are so-called “German multi-family” deals – transactions backed by a large portfolio of residential properties that are rented out by commercial landlords.

Gagfah, the German property group controlled by Fortress Investment Group, has a €2bn ($2.6bn) CMBS maturing in August 2013, which it has sliced into different tranches. It expects to use one pool to issue a new CMBS in the first half of this year.

Last month Gagfah also secured a €1.06bn loan from Bank of America Merrill Lynch for its Woba portfolio, to refinance debt due this year. The expectation is that that loan will be securitised.

Meanwhile, in the UK, Deutsche Bank has been mandated to arrange a £400m CMBS for Blackstone’s Chiswick Park business complex in west London – the development of which was part funded by a CMBS in 2011.

Mark Nichol, research analyst at BofA Merrill Lynch Global Research, said: “The availability of financing for commercial property has declined and loan margins have increased since the financial crisis began, as a number of bank lenders that were previously active have since curtailed or restricted lending to commercial property in response to higher regulatory costs and a desire to reduce exposure to the sector.”

He added: “This has opened the door for new lenders to emerge and CMBS to return. Spreads on German multi-family CMBS notes have reached levels that are now competitive with bank loan margins for similar leverage.”

Investors are likely to have taken comfort from the €754m Florentia CMBS last year and a second deal, involving the securitisation of a loan used to refinance Royal Bank of Scotland’s sale of non-performing real estate, to a vehicle owned by RBS and Blackstone.

While investor appetite for prime real estate in London and German multi-family transactions is high, analysts point out that upcoming transactions are focused on restructuring deals and issuance remains a fraction of what it was in the boom years of 2004-2006.

A recent report by Moody’s predicted that nearly 60 per cent of European CMBS loans would not repay in 2013 and that in the next five years losses in the pool of loans could hit €10bn.