European CMBS loan defaults have continued to increase with 10 loans that defaulted in Q210, bringing the total at the end of the quarter to 8.7%.

According to Fitch Ratings, the fastest growing category of defaulted loans are those that reached their scheduled maturity dates and failed to make their balloon payments. Fitch expects maturity defaults to grow over coming quarters as the majority of loans continue to fail to make their balloon repayments.

"Secondary quality collateral presents a number of challenges: above-average market value declines due to the large, and increasing, yield gap between prime and secondary properties, a shortage of investor interest and a scarcity of bank funding," said Andrew Currie, managing director in Fitch's European structured finance team. "Equity investors and lenders alike remain concerned about the ability of secondary properties to generate income in the future."

Only 17% of U.K. CMBS loans are secured by prime collateral and a similar trend is visible on the continent, leaving the majority of CMBS collateral exposed to difficult market conditions.

According to the latest IPD Research and Market Data, the U.K. commercial property market posted 15.4% capital growth since it reached a trough in June 2009. But the pace of growth has slowed, with the latest July data printing at just 0.2%, the lowest since the recovery last year.

"We expect current CMBS restructurings (typically centered on extensions over one or two years) to be only temporary solutions at best under any such ‘double-dip’ scenario, that aside we would note that recoverable values for creditors risk worsening further into 2011/12," Royal Bank of Scotland analysts said. "Values for the remaining five months of 2010 will fall by 4.5%, with another 7.5% decline implied for 2011. As a result those that made the decision to ‘extend and pretend’ may find loans now maturing in even weaker markets."

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