The European commercial real estate securitization market is back!
According to a recent report from DBRS, the European CMBS market has experienced a steady stream of issuance since November 2017 after expectations for a post-crisis return had largely petered out. Although, it is still too early to predict a significant return this time around, DBRS wrote, competitive pricing has helped CMBS see a resurgence in issuance.
However, the report added CMBS deals have re-emerged with new and interesting structural features that have not been seen before. This report will highlight the key structural changes investors should be aware of in recent European CMBS transactions.
Issuance of European CMBS transactions has begun to re-emerge after virtually disappearing from the European securitization market. Before the global financial crisis, annual European CMBS issuance grew to a peak of EUR 61.7 billion in 2006 from EUR 11.1 billion in 2003. However, after the market turned down, issuance was very limited for European CMBS. Transaction volumes post-crisis ranged from EUR 340 million in 2008 to a high of EUR 8.5 billion in 2013, and were helped by the refinancing of a number of deals, including German multifamily transactions (which have since been refinanced outside European CMBS), in particular.
More recently, after a reasonably strong year in 2015 with ten transactions, and following an equally steady 2014, expectations were for a return to a regular issuance market in Europe. However, issuance dried up to only one or two European CMBS transactions per year. In 2016, there were only three transactions, one of which was a tap issuance for the pub group, Greene King.
European CMBS is still a relatively small avenue of funding for commercial real estate. There are many alternative sources of funding from deposits and covered bonds to insurance companies and direct loan funds. As a result, European CMBS is very sensitive to the relative cost of these funding alternatives. With readily available low-cost central bank financing to the banks and beneficial capital treatment for commercial real estate loans over CMBS bonds for insurance companies, the demand for the securitization of commercial real estate loans diminished.