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CRE Finance World Summer 2015
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Borrowers
In the pre-GFC era, the main attraction to a borrower of a CMBS
loan was the hugely attractive pricing compared to balance sheet
loans. As interest rates rose in the months immediately prior
the GFC, the attractive price offered by CMBS loans fuelled the
exponential growth of the CMBS market with increasing numbers
of borrowers seeking finance through this means. However today’s
market is the complete antithesis of this with interest rates at
record lows which, coupled with increased competition from lenders
(especially the less regulatory constrained shadow banks), has
enabled borrowers to obtain financing at record low rates without
the need to turn to CMBS. Consequently, despite the re-opening of
the CMBS market there is not the same appetite from borrowers for
CMBS loans that generated the surge of issuance in the months
prior to the GFC.
What are the drivers?
Arrangers
Although the level of CMBS 2.0 issuance has been low compared
to the levels reached at the peak of the market, this is unsurprising
given how few arrangers are bringing CMBS deals to the market.
Inevitably over time, the number of arrangers will undoubtedly
increase, providing a much needed boost to primary issuance
however such players can also be forgiven for being reticent. The
successful execution of multi-loan and multi-borrower transactions
during 2014 is a much welcomed boost to opening up the market
for new arrangers, as such deals demonstrate the market is not
simply confined to sourcing and securitising a very limited stock
of large loans but it has also given the nod to the securitisation of
a portfolio of smaller loans.
Investors
On the investor side, with the continued low interest rate environment,
the ECB’s introduction of large scale quantitative easing, and
investors’ relentless search for yield, CMBS is increasingly looking
like a desirable proposition for the fixed income investor. Unfortunately,
due to the stuttering and lumpy nature of issuance over the past
few years, investors have been reluctant to put in place the internal
resources and infrastructure required to invest in this asset class
with any real volume. If however, the market can demonstrate that
it is capable of delivering greater primary issuance with a smoother
flow of deals, this will precipitate the deeper and stronger investor
base required to absorb and competitively price the volume of
deals that should hopefully be destined for the market.
Borrowers
The real driver for significant primary CMBS issuance is however
likely to lie in the hands of the borrowers and their demand for
better priced loans spurred on by a rising interest rate environment.
However before CMBS becomes flavour of the month for such
borrowers, the regulators will have to first clamp down on the
shadow banks and through regulation erode the competitive
advantage that they currently enjoy over traditional CRE lenders
(although given the pace of regulatory change this is unlikely to
happen anytime soon). With the levelling of the regulatory playing
field and a rising interest rate environment, it is likely that borrower
demand will drive the CMBS market and then once again we will
see significant primary growth.
As has been demonstrated by the number and type of CMBS 2.0
deals that have hit the market since Chiswick Park, CMBS clearly
has a role as a financing tool for CRE in Europe. In particular,
CMBS has an integral role for financing those assets that would
otherwise be more difficult (due to size of the loan or complexity
of their underlying structure) for a bank to distribute in the
syndication market.
It is inevitable, that with more arrangers in the market there will
eventually be a greater volume of CMBS issuance. Equally with
regard to the seasoned players, they will generate more deals as
they become more efficient in executing transactions in various
jurisdictions. However it will not be until interest rates start to rise
and there has been a greater standardisation of regulations that
apply to the shadow banks that we will start to see a meaningful
increase in CMBS issuance. Although it is frustrating that there
has not been a boom in primary issuance, this may not be a thing.
The gradual growth coupled with the refining and finessing of
structures that we are currently witnessing, will ultimately make
European CMBS a far more sustainable and robust financing tool
for CRE.
Some Crystal Ball Gazing on European CMBS