Real Estate News
News analysis: CMBS second time around
03 Aug 2012
Will new guidelines do anything to revive the languishing European CMBS market? Shayla Walmsley reports.
From now on, European commercial mortgage-backed securities (CMBS) should be transparent, structurally intelligible and clearly reported to investors. That was the upshot of a set of market principles published last week by the CRE Finance Council.
The principles are an attempt to bury the ghosts of vintage securitisations and to rebuild a CMBS market that, despite predictions to the contrary, has failed to emerge.
The timing could be better. In the year to date, Europe has come up with CMBS loans worth just €269m. In contrast, €2.5bn in outstanding CMBS became payable last month alone. So will these new guidelines spur otherwise cautious investors into securitisation any time soon? Probably not - but that is that the ultimate intention?
Admittedly, the guidelines have some backers with clout. Deutsche Bank, responsible for the only two large European CMBS of the past 12 months, Chiswick Park and Merry Hill, contributed significantly to their development.
But there is, for example, no element of compulsion, no penalties for failing to adhere to the guidelines. In its introduction, the CRE Finance Council described them as "only suggestions of best practice", adding that it would be up to market participants to decide whether or not to apply them.
"Do they have to follow the guidelines? No," says a source involved in drafting the guidelines. "But if I were a noteholder, I'd want to know why not. We've had a lot of feedback and input from arrangers and they're interested in getting the market back. They need to bring investors back in. If investors are at a premium and fairly scarce, it's in arrangers' interests to adopt the guidelines."
It makes no difference how well structured, transparent or well-communicated new CMBS might be, if investor reluctance to invest in the broader real estate market mean none are issued, said David Lebus, associate analyst at Jones Lang LaSalle Corporate Finance.
Currently there is no obvious investor appetite. In terms of income, CMBS are an obvious pension fund investment - which is why it is such a popular one among US public pension funds. Not so in Europe.
One obstacle is duration. Pension funds are biased towards long-dated investments, but CMBS have the promise of yield - a rare phenomenon among fixed-income options.
"Whether CMBS becomes more attractive to pension funds is up to the individual arrangers," says the source. "Typically, commercial real estate loans have tended to be three-five-year money, which doesn't necessarily suit pension funds. But Solvency II requirements on liquidity might make it more attractive [by creating incentives to short-term investment]."
Another barrier is regulatory ambiguity. Charles Roberts, finance partner at law firm Paul Hastings, points out that regulators have viewed CMBS as a securitisation issue rather than as a by-product of the credit market. "In typical fashion, they legislated before they understood," he says. "It's snowballing into a disaster for Europe - some would say it already is one. But now regulators are also under political pressure to solve the credit crisis."
As an asset sub-class, CMBS needs metrics. Ratings agency Standard & Poor's did little for the market - or itself - when it pulled its rating of a Citi/Goldman Sachs CMBS at the last minute last year.
An announcement earlier this year that it would change the way it rates both new and vintage CMBS by including a "qualitative overlay" rather than relying on an inflexible analytic model failed to impress. Despite its attempt to get issuing banks back onside, Deutsche said in a research note the clarified methodology would "disappoint most investors". Other agencies, including Moody's, continue to rate CMBS, but the absence of a consistent rating methodology will hardly boost the market.
"No-one's kidding themselves that [the guidelines] will make any difference to market activity," says Roberts. "But it is a helpful step that might mean the market revives more quickly than it would otherwise have done."
Author: Shayla Walmsley