Aside from the growing CDO sector, the medium term pipeline in Singapore will continue to be largely focussed on property assets. "There are at least two to three more CMBS-type deals in the works, which we will hopefully see before the year-end, and there is also potential for single-owner property-type CMBS deals to emerge, " says Ben McCarthy, senior director and head of Asia-Pacific structured finance, at Fitch Ratings.
Jerome Cheng, vice-president at Moody's Investors Service, agrees that there are a lot of real estate related transactions expected in the pipeline over the next few months. "We are expecting real estate related deals to continue to emerge in the second half of the year - CMBS, as well as progressive payments or deferred payment deals, which we have seen in the last couple of years. That banks are required to off-load their non-core assets may also bring further opportunities for CMBS transactions."
CMBS deals from Singapore this year have included Cobalt Asset Management, a securitization of rental lease receivables from the Siemens Center Building (still under construction), Silver Maple Investment Corporation, a tap issue for the CapitaMall Trust, and Riviera Investment Ltd, a deal involving the sale of contracts for the purchase of yet to be completed apartment units in a residential housing project.
There are also a large number of CMBS deals in Singapore, which are not rated but launched on the local domestic market.
Another interesting question to explore is the impact that the growing development of the REIT market is having on CMBS, even though Raj Shourie, managing director and head of Asian securitization at Deutsche Bank, believes it is still too early to say. Shourie notes that, from a client perspective, REITs offer another financing tool and therefore they are likely to factor this in when they are considering all the financing options available to them.
Cheng at Moody's points out a good example of the way REITs and CMBS are co-existing, in the recent Silver Maple Investment Corporation transaction, where the REIT, namely the CapitaMall Trust, used a CMBS structure as a funding alternative. "A good funding alternative for REITs could be a secured borrowing, as the interest rates will be much lower on a triple-A securitization deal than they would be on the unsecured markets, where a REIT may or may not be able to obtain a triple-A rating," he explained. "Therefore CMBS offers very attractive funding alternative to a REIT, and we would expect other REITs to consider CMBS as a funding alternative going forward."
McCarthy at Fitch shares a similar view that the development of the REIT market could positively impact the CMBS market - rather than act as a competitor. The reasons for this reside in the fact that both the Singapore and Hong Kong property sectors have come under a lot of pressure in recent years, with an overall downward trending property market.
Fitch has found that many property owners are slow in writing down the value of their property in a declining market and are often surprised at the amount of debt that can be raised at a particular rating level. McCarthy says that this is often the result of the owner and Fitch having very different views of the valuation of the property as opposed to differing views on the allowable loan-to valuation ratio.
"In a CMBS deal the equation that has to be weighed is how much debt can be serviced based on the current property income. Increasing vacancy rates and low property yields mean relatively low Fitch valuations," McCarthy explained.
But in the REIT market, the Singapore (and Hong Kong) authorities have also put in place gearing limitations in relation to current valuations. So, for instance, the amount of debt raised is limited to 35% of the current valuation. This, says McCarthy, is conservative, and therefore might make securitization look like a more attractive option, as triple-A capital markets funding can be cheaper than pure bank debt.
As in the recent Silver Maple Investment Corporation Ltd deal, which issued in June a total of SG$272 million (US$155.3 million) triple-A rated CMBS under its medium term note program, originators may opt for securitization deals rather than opting for unsecured structures.