Following the onset of the financial crisis in 2007, any mention of ‘commercial mortgage backed securities’ or ‘CMBS’ was regarded as a dirty word and at one point the term was destined to face certain extinction. Seven years on, several issuances later and following a prolonged upswing in financial market sentiment, not only is the term CMBS back in favour but it is also positively trending. The upcoming issuance of £750 million of CMBS notes secured by the Westfield Stratford City shopping centre will not only be a defining point for CMBS issuance in 2014, but can also be considered a key step forward towards the re-establishment of CMBS as an essential funding tool for commercial real estate (CRE).
At the end of 2013, many commentators were estimating that CMBS issuance for 2014 would be in the realm of €10-15 billion. Assuming that Deutsche Bank and Credit Agricole CIB can successfully launch the Westfield transaction, then CMBS issuance for 2014 will sit at just under €11 billion and therefore exceed the lower realm of this €10-15 billion estimate. As industry participants head off on their summer breaks, there should be a level of euphoria that the CRE industry will have already surpassed the total issuance for 2013 (€8.7 billion) with a number of months of the year still to run. With rumours of further deals in the pipeline, there is every chance that 2014 could be regarded as a bumper year for the CMBS asset class.
Although the numbers are encouraging and certainly demonstrate that CMBS has a seat at the European CRE financing table, one of the most striking things about the re-emergence of a European CMBS market has got to be the dominance of various trends, which at times have dwarfed some of the more compelling stories in the market.
Following Deutsche Bank’s €754 million Florentia multifamily issuance at the end of 2012, multifamily transactions came to dominate in 2013, with mega issuances by issuers such as Taurus 2013-1’s €1 billion note issue and GRF 2013-1’s €4.3 billion note issue. Although these deals have given the CMBS asset class a much needed boost, on account of the fact that the payment streams for such notes primarily stem from individuals funding their private residences, the classification of such properties as true commercial real estate has always been questionable.
Against the backdrop of multifamily transactions, there were two CMBS issuances that can be regarded as hugely significant as they ushered in a new era for CMBS 2.0. Firstly, there was the eagerly awaited Debussy transaction, a CMBS secured by a number of Toys r’Us stores with a CMBS structure that is notable for containing a number of industry firsts. However the most significant feature of the Debussy structure is that it in effect created a blueprint by which shadow banks, such as investment funds, can provide CRE bridge financing to a borrower and then exit this position through the issuance of CMBS notes. The other noteworthy transaction for 2013 was Goldman Sachs widening the CMBS 2.0 geographical net with the issuance by Gallerie 2013 srl of €363 million CMBS notes secured by Italian retail property. A primary driver for such an issuance was attributable to the fact that domestic regulations in Italy require institutions purchasing syndicated loans to have a banking licence, CMBS overcomes this restriction and provides a financing tool which expands the potential universe of investors.
Off the back of the Gallerie 2013 srl issue, the Italian CMBS trend continued into 2014 with the issuance of €355 million notes by Deco 2014 – Gondola and €198.2 million notes issued by Moda 2014 Srl. Although maybe not the highest profile deal of the year, but certainly one of the more exciting developments in the industry, has been the issuance by Taurus 2014-1 of £211,500 of CMBS notes secured by properties that have been acquired through the enforcement of defaulted loans. As a result of the Taurus deal, the market has given a clear nod to the CRE finance industry that CMBS should not be confined to prime commercial real estate. In stark contrast, with the imminent issuance of the £750 million Westfield CMBS notes, the market has also shown that there is also appetite for mega issuances of CMBS paper secured by a single prime retail property.
Given the lumpy nature of the market, it is difficult to put too much emphasis on the presence of the multifamily and Italian trends however given that there can be said to be trends at all, then this has to be regarded as an industry positive. At the height of the financial crisis, the CMBS product was subject to intense scrutiny and its role (if any) in financing European commercial real estate was frequently questioned with many commentators reaching the view that CMBS as a funding tool would only ever be used to fund core real estate in prime locations. Transactions such as those mentioned above clearly demonstrate that not only is the CMBS term not extinct but that CMBS is a versatile funding tool that has a greater role to play for financing commercial real estate than many commentators first predicted or in some cases ever hoped for.