LONDON - At the Information Management Network s second annual European CMBS conference held here last week, prepayments preyed on the minds of CMBS investors. But still, panelists speaking at last week's opening session argued that prepayment levels, while high in European CMBS, won't be enough to change the market's strong fundamentals.
The number of attendees reflected the increasing number of participants in the sector both on the buyside and sellside. And the overall tone of the conference was optimistic, with positive issuance numbers on the horizon.
After a healthy 2005 where European CMBS more than doubled 2004 volumes, further significant market growth is expected, with the positive credit environment encouraging deal volume to rise. Ganesh Rajendra, head of European securitization research at Deutsche Bank and moderator of the opening panel, said that if his predictions are accurate, CMBS will account for 25% of the securitization market this year.
Arvind Bajaj, managing director at Credit Suisse echoed a similar prediction, adding that he expects the market to experience growth not just for the next two years, but possibly over the next five to 10 years. By comparison to U.S. CMBS levels, panelists said that Europe - across all jurisdictions - still has a lot more room for expansion.
This is the case for the conduit side of the business, which has experienced aggressive growth but still has not reached maturity. Panelists speaking at the second session of the day said that conduits accounted for approximately 50% of the European CMBS market. "It's a market that is still growing, with lots of issuance expected this year," said Jerome Jacques, managing director and head of RMBS/CMBS at SG CIB. "European conduit issuance still only represents about one-third of U.S. volumes - it is still kind of a new market that is highly U.K- concentrated."
Lack of secondary trading
Meanwhile, the lack of secondary market activity could hinder further growth, panelists said. "For a market to be mature it has to have active secondary liquidity and we certainly don't have that," said Caroline Philips, head of European securitization and debt capital markets at Eurohypo.
But Dino Di Costa at Credit Suisse said that European CMBS buyers are driven by a buy-and-hold nature, which makes it difficult to see performance on a secondary level. In terms of transparency, he said that the market has come a long way. "Research has improved, performance monitoring has improved - there is still a long way to go but we will definitely get there," he said. "But I don't think it will lead to any massive trading volumes given the nature of this market."
From a jurisdictional perspective, the U.K. dominated two-thirds of conduit issuance last year. Arjan van Bussel at ABN AMRO said this is partly because the U.K. tends to put out the larger based benchmark issues, which is mostly attributable to the liquidity of U.K. mortgage loans. In the U.S., 35% to 40% of these loans are put into conduits and the U.K. has only reached levels of 35%, which leaves some marginal room for growth.
In continental Europe, that figure is even lower - at about 11% - certainly allowing room to increase sector volume. Bussel attributed the slower growth on the continent to cultural nuances. For example, in the U.K., corporates tend to rent rather than own while it's the opposite in France. Bussel said it is likely that corporates in France and other segments of Europe will monetize their real estate assets like the U.K. corporates have done.
"In France, there is a huge demand for real estate but not much room for mortgage lending - most sales are done through selling shares and not the outright selling of the building," explained Bussel. "And in France there is no B note structure due to legislation."
Bussel said that legislation is expected to change and become more favorable to structuring A/B note CMBS structures but, at this point, the legislation remains largely securitization unfriendly.
Meanwhile, the German market is undergoing major real estate restructuring funded through the conduit market. Jacques said that France experienced a similar restructuring in the early 1990s but CMBS was not an option then. Upcoming changes to the legislation should see French volumes grow beyond its 3% European CMBS volume share recorded last year.
Italy is another jurisdiction earmarked for future growth. The Italian Treasury said it expects to do around 30 billion ($36.6 billion) in business over the coming years. Other areas experiencing increases in conduit issuance include the Nordic region. Swiss legislation now allows foreigners to invest in real estate, which should drive CMBS volumes going forward.
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