Monday 23 April 2018

European CMBS deals back in fashion, with Irish assets in demand

Stillorgan Shopping Centre formed part of the Opera CMH commercial mortgage backed security
Stillorgan Shopping Centre formed part of the Opera CMH commercial mortgage backed security

Alastair Marsh and Neill Callanan

Signs of life are starting to appear in Europe's commercial mortgage bond market, frozen since the financial crisis crushed real estate values seven years ago.

Bank of America sold €445m of notes in the biggest deal this year on Thursday, while Royal Bank of Scotland is marketing bonds tied to debt on 20 UK properties that fell into the hands of administrators.

Last month, Deutsche Bank was book runner on the first Irish CMBS since 2006. "Deco/Harp" as the bond is referred to, was backed by a number of properties in Dublin and elsewhere owned by the likes of Kennedy Wilson and the Comer Brothers. Those bonds are thought to be trading slightly above par and have been trading well in the secondary market.

The high profile failure of the Opera CMH CMBS, which was backed by a number of assets including the Stillorgan Shopping Centre, from the Celtic Tiger days had hit Ireland's attractiveness as a location for mortgage backed bonds.

Issuers are forecasting the busiest year since 2007 as record-low returns from fixed-income assets spur money managers to buy real estate, reinvigorating Europe's €50bn market for commercial mortgage-backed securities. The bonds became a byword for distress during the crisis, when the value of thousands of properties dropped to less than outstanding debt.

"CMBS is an asset class that is primed to do well," said Gordon Kerr, head of European structured finance research at credit ratings firm DBRS in London. "Conditions are just right for issuance, with property prices going up in many parts of Europe, hedge fund and private equity firms looking to recycle capital, banks originating new loans and investors reaching for anything with a bit of yield."

New bonds from Bank of America and RBS will take sales this year to €1.3bn, a tenfold increase from the same period last year, according to data compiled by Bloomberg and JPMorgan Chase. The European bond market contracted by about 40pc since 2010, after a slump in property prices stopped landlords refinancing loans and investors shunned the debt after nursing losses.

Bank of America's notes are secured by a loan refinancing The Squaire, a Frankfurt office and hotel complex so large it boasts its own postal code. IVG Immobilien, the building's owner and once Germany's biggest real estate firm, borrowed from the US lender after a €3.2bn debt restructuring triggered by the real estate slump.

A record 20pc increase in European commercial real estate values last year was accompanied by a 55pc rise in real estate lending. That's providing the raw material for new CMBS.

"The key to regular CMBS issuance is loan origination," said Clive Bull, who manages the European commercial real estate group of Deutsche Bank in London. "With deals from Italy, Ireland, the UK and Germany already seen this year, we are optimistic on growth."

The German lender last month arranged the first sale of notes backed by Irish commercial mortgages since the financial crisis.

With the European Central Bank pledging to buy €1.1 trillion of debt, yields on fixed-income securities have touched record lows. That's another reason the CMBS market is primed for deals, said Felix Blomenkamp, the head of Pacific Investment Management's (PIMCO) European asset-backed securities team.

Investors on average demand 162 basis points of extra yield to hold top-rated European commercial mortgage-backed notes compared with benchmark rates, according to JPMorgan. That's down from 185 basis points a year ago and compares with 24 basis points on Dutch bonds secured by home loans.

"The conditions are generally good for the commercial real estate market as investors are searching for yield," said Pimco's Blomenkamp. "CMBS is part of that story and I would expect to see more new issuance over the next quarters." (Bloomberg)

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