Expectation of only sporadic EMEA CMBS issuance confirmed for H2
2009New issuances of CMBS in Europe, the Middle East and Africa (EMEA) are projected to stay sporadic, according to Moody's Investors Service in its 1H09 review and 2H09 outlook report for the sector.
The full year issuance volume has been revised upwards by the rating agency to €20 billion, which is still considerably less than the volumes seen in 2005 to 2007. The rating agency said that there is some investor demand for credit-tenant-lease CMBS.
"In the first half year of 2009, issuance volumes were well above the full year of 2008 volumes. That was mainly driven by three retained transactions amounting to €11.4 billion compared to the total issuance volume of €14.7 billion for the first half year of 2009 and total issuance volume of €6.3 billion for the full year of 2008," said Alexander Zeidler, a Moody's assistant vice president/analyst and co-author of the report.
Irrespective of the volume rise compared with last year's levels, the rating agency said that most of the CMBS deals were retained and not placed with investors.
The biggest rationale for still low open market issuance volumes in 1H09 was the ongoing concern about the EMEA economies and real estate markets.
"In 1H09, the commercial property investment market showed limited activity, the occupational market was weak with reduced tenant demand and banks continued to hold real estate lending activities at very low levels," says Jeroen Heijdeman, a Moody's analyst and co-author of
The commercial property markets across all European countries and property types saw continued value declines in the 1H09. The value decline was most pronounced in the U.K. in 1Q09, but other main CMBS markets like France and Germany also experienced value deterioration. The value dips were not only driven by yield widening, but also rental value drops. The trend of widening yields slowed towards the end of the second half year for selected prime commercial properties in the U.K. that feature strong lease profiles.
Moody's expects the trend of declining rental values to remain in 2H09 and that most EMEA commercial real estate markets will experience some improvement in 2010. The rating firm projects moderate property value increases from 2011 onwards. A material recovery of commercial property values over the next five years is unlikely, in Moody's view.
The rating agency believes that the focus in 2H09 will still be on the performance of existing deals and predicts that the adverse loan performance trend will accelerate, depending on the state of the economy and the availability of capital to refinance commercial real estate
loans. Moody's expects new retained CMBS issuances in 2H09 and expects continued interests from investors for credit-tenant-lease securitisations as seen towards the end of 1H09.
Looking beyond 2009, Moody's expects that the capital markets will still play an important
role in financing commercial real estate. This is needed in order to close the financing gap arising from significant loan refinancing volumes due over the next years while banks are reducing exposure. The future of CMBS deals will not be decided soon, according to Moody's, although investor demand will probably focus on single-loan CMBS as well as granular CMBS deals that are less complex.