Page 27

CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 25 • Canadian and U.S. unemployment rates today are very similar (7.1% in Canada v. 7.3% in the U.S.). Historically, the unemployment rate in Canada has always been higher (by 1% +/-) than in the U.S. Since the financial crisis, these rates have inverted as the Canadian unemployment rate dropped significantly below U.S. levels. These rates appear to be converging again as the U.S. economy improves. However, despite recent fluctuations in the Canadian rate, unemployment in Canada is virtually unchanged from a year ago and total employment is up 1.4%. This addition of 246,000 jobs over the past twelve months is expected to translate into increased demand for all forms of commercial real estate. • Canadian residential mortgages are not tax deductible and are full recourse to the homeowner. For this reason and others (see Canadian homeowner equity below), Canadian residential mortgage markets are performing very well. Canadian residential mortgage loan arrears are currently at their lowest level since November 2008 — Canada Mortgage and Housing Corporation (CMHC) reports 0.35% of residential loan arrears across Canada and the Canadian Bankers Association reports 0.31% as of May, 2013. U.S. residential delinquencies at the end of Q2/2013 were 6.96% (its lowest level since mid-2008, but still over 20 times higher than in Canada). o CMHC is Canada’s national housing agency and largest public mortgage insurer. In many respects CMHC is similar to the U.S. GSEs (Fannie Mae and Freddie Mac), however, it is a Crown Corporation whose insurance bears the full faith and credit of the Government of Canada. • Canada does not have (and never has had) a sizeable sub-prime residential mortgage market. For the most part, Canadian lenders have avoided “no equity” loans, “teaser rates” and other embedded time bombs that have created significant default rates on U.S. residential loans. • Finally, homeowner’s equity currently is (and has always been) significantly higher in Canada than in the U.S. Canadian households average approximately 68% equity in their homes. Not surprisingly, “negative equity” is virtually non-existent in Canada. In the U.S., pre-recession homeowner equity never exceeded 60% and is approximately 47% today. Conclusion Canadian CMBS has been around for 15 years. During that time, it has survived three global market disruptions — the 1998 Russian currency crisis, the 2000–2001 “tech bubble” and the 2008–2009 financial crisis, and their related economic downturns, three Canadian Prime Ministers and three U.S. Presidents. It has maintained a pristine credit record and a virtually non-existent delinquency and loss rate. Canadian CMBS credit spreads have been far less volatile, normalized more quickly than the U.S., and new issuance currently provides a discount to comparable U.S. CMBS bonds in the AAA and A tranches. Canadian CMBS has thrived in all markets by providing investors with strong risk-adjusted returns based on exceptional credit performance and its market premium over U.S. CMBS bonds. Looking forward, we expect that the investment grade tranches of new Canadian CMBS deals will be actively marketed and placed cross border with U.S. and other non-Canadian investors who understand the relative value of this product. For these investors, Canadian CMBS is one of the best opportunities to diversify their portfolios with real “low hanging fruit”. About the Authors Mr. Gamm is a Vice President with IMC responsible for CMBS and real estate debt credit, and formerly responsible for business development with Fitch Ratings-Canada, previously headed Moody’s Canada structured finance rating program after similar credit analysis/review positions with Moody’s-London (UK) office. Mr. Kane has been a Principal of IMC since its formation in 2009, and a former senior executive with the Merrill Lynch-Canada CMBS program founded in 1998, and is experienced in real estate finance and capital markets structured finance. Mr. Klaassen is a partner in Stikeman Elliott LLP’s and co-head of its Structured Finance and Financial Products Group in Toronto and has been involved in real estate finance since 1987 and structured finance since 1998. Canadian CMBS: “Low Hanging Fruit” For U.S. Fixed Income Investors


CRE Finance World, Autumn 2013
To see the actual publication please follow the link above