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CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 31 Although German multifamily refinancings have been strong, only about a fifth of our rated CMBS universe fits the profile of recently securitized loans. As such, we expect that the vast majority of legacy loans are unlikely to be refinanced through the CMBS market. Maturing legacy loans will continue to face long-term refinancing and repayment issues and borrowers will likely continue to look to traditional bank financing to refinance, in our view. The absence of a normalized commercial real estate lending market could also constrain potential CMBS volumes in the near to medium term. As a result, we expect limited issuance for the rest of the year, with an estimate of €6.5 billion, just slightly above current levels. CRE Capital Values Are Still at a Significant Discount from Their Peak The European CRE market is fragmented — both by nation and even regionally within the countries with the largest markets. In addition, differences in terms of demand, occupancy rates, capital value volatility, and access to financing delineate a polarization between prime and non-prime properties. Local, regional, or even global supply and demand shape each market and could affect the property assets performance as well as their funding. For instance, a city such as London has characteristics appealing to a potential global base of investors and is less sensitive to local factors. While it would be misleading to assume that all individual European CRE markets move in perfect sync, the latter were all severely affected by the adverse macroeconomic conditions prevailing during the great recession; this trend still holds true in peripheral countries. The economic integration and interdependency among European countries as well as the mobility of capital and banks’ cross-border activities increased the correlation between their CRE markets’ behaviors. All major CRE markets saw a sharp fall in capital values during 2007/2008 followed by a rebound that occurred mostly in the primary markets. Soft conditions continue in the non-core markets (see Chart 4). Chart 4 Capital Values Between Q1 2007 and Q1 2013 •Arithmetic average of industrial, retail (high street), retail (shopping centers), and offices. Source: CBRE Since late 2009, a few markets have seen a notable bottoming-out in capital values and an associated fall in yields. This occurred mainly in prime segments of core European markets such as Germany, France, the U.K., Switzerland, and Scandinavia. German real estate values have been particularly strong, and in core markets such as Paris and London, values have stabilized. However, values are still declining in markets considered peripheral and for non-prime properties. Capital values in weaker markets — such as Ireland, Spain, and Greece — are either stagnating or recording a sluggish growth. The combination of an ongoing severe recession, banking sector difficulties and, in some cases, sovereign problems has put further downward pressure on capital values. The U.K. is by far the largest European CRE market with an invested stock in excess of €600 billion. According to CBRE data, the Central London office capital values fell 67% from the mid-2007 peak to third-quarter 2009 then rose by 71% until third-quarter 2012 but have since slipped 1.5%; they remain 45% below the CMBS Global Recovery Continues to Be Slow and Uneven


CRE Finance World, Autumn 2013
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