Sustainable CMBS Market Recovery in EMEA Unlikely in 2010

Sentiment for EMEA commercial real estate picked up in H2 2009, but Moody’s remains cautious about a significant value recovery.

In Moody’s view, a few pre-conditions need to be met before the CMBS market can return.

The main ones are:

(i) continuing stability of the debt capital markets once central banks and governments progressively withdraw their support;

(ii) a sustainable recovery of the CRE market;

(iii) a broad return of CRE lending and;

(iv) improved sentiment towards the refinancing risk of outstanding CRE loans.

Although some progress was made last year, it will take more time before those conditions are fully met.

A potential capital market exit for CRE loans may take the form of “CMBS 2.0”

Looking beyond 2010, Moody’s expects that next to balance sheet lending, the capital markets will still play an important role in financing commercial real estate. This will be necessary to close the gap between the significant refinancing volumes due over the next years and the limited capital expected to be provided by banks. Covered bonds can bridge some of this gap but they are limited to the senior portion of loans and the bank issuing them retains the risk on balance sheet. Some form of CMBS will still be needed by banks to fully transfer the risk to the capital markets.

In Moody’s view, it is possible that, next to the legacy stock of CMBS transactions, a new generation of deals will start to emerge in the primary market (often referred as “CMBS 2.0” by market participants). These new deals will most likely contain lower leveraged loans and avoid some of the structural shortcomings of legacy deals. As a consequence, Moody’s expects that “CMBS 2.0” would be issued at tighter spreads than those at which pre-crisis deals trade in the secondary market.

For details, see2009 Review and 2010 Outlook EMEA CMBS.