Moody’s Investors Service expects commercial mortgage-backed securities in Europe to perform poorly over the next two years.

The culprit, unsurprisingly, is the protracted Eurozone crisis.

Not all deals are in the same basket, however. “Refinancing prospects among [commercial real estate] loans maturing over the coming years will differ significantly depending on the quality of the underlying properties and the leverage of the loans,” said Oliver Moldenhauer, a senior analyst at Moody’s, in a report.

He added that CRE investments will remain focused on prime properties. In those areas, prices should be stable. But non-prime properties are likely to see a continued drop in values as investors stay away. Moody’s expects non-prime properties to stabilize in 2015.

“The tiering of the market is especially pronounced in the U.K.,” Moldenhauer said. “Most lenders are focused on the London market, while financing for properties in secondary markets outside the capital is very limited.”

Higher regulatory capital requirements are also weighing on the sector. In Moody’s view, a recovery in lending will only take place starting in 2014 and will likely be moderate.

In another sign of a dysfunctional European market, the share of loans that have repaid at their maturity date has consistently edged down over the past few years (see chart below). In the first three quarters of 2012 only 35% of the 118 loans originally scheduled to mature either fully repaid at maturity or prepaid. The figure was 65% in 2009.

The rolling composite of loan outcomes represents those with original scheduled maturity dates in Q1-Q3 2012.

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