Refinancing for European CMBS continues to be challenged by a prolonged recovery in the lending market for non-prime properties.
Deutsche Bank analysts said that the greater risk to near-term CMBS performance still lies in the ability to refinance these loans in a much tighter lending environment amid significant declines in valuation.
According to property firm CB Richard Ellis (CBRE), there is approximately €790 billion of commercial real estate (CRE) debt outstanding in Europe of which €207 billion is comprised of loans secured on poor quality real estate at high LTVs, which potentially can be subject to work-out. CMBS deals with loans secured by non-prime properties that need refinancing in 2012-2013 face the greatest risk of downgrade.
Moody's Investors Service anticipates that the availability of financing for non-prime properties will not increase meaningfully over the next two years. Additionally, capital values for non-prime properties will remain low over the next years and loan-to-value levels will remain high.
"Availability of commercial real estate financing will not increase meaningfully over the next two years, and will also remain subject to strict underwriting criteria and heavily dependent on the underlying property quality," Moody's analysts said in a report. Because of this they said that the refinancing prospects among the CRE loans that will mature over the coming years will differ significantly depending on the quality of the underlying properties.
The rating agency said it is increasingly concerned about the downside risks in CMBS and said that it could affect the wider CRE markets in a number of European countries.
"Although the macro-economic concerns initially applied mainly to southern European countries and Ireland, other countries like the U.K. appeared not to be immune in 2010," Moody's analysts reported."Across Europe, the authorities have announced wide-ranging austerity measures relating to cuts in public spending and tax increases, which will become apparent in 2011 and could hurt employment and consumer spending."
The rating agency also expects that this increased refinancing risk for highly leveraged loans secured by nonprime properties, especially in the U.K., will be the main driver for downgrades.
The risk of downgrade is greatest for transactions backed by loans that refinance in the 2012 to 2013, especially transactions that have already had downgrades in the past two years.