During the European Autumn CREFC conference, a panel of leading CMBS participants were posed the question of whether European CMBS was stuck at the bar while the market danced. The general consensus of the panel was that although CMBS may have moved away from the bar, it was standing very much at the edge of the dance floor. Given the disappointing level of CMBS issuance for 2014 compared to 2013 and the roller coaster ride experienced by CMBS participants since the global financial crisis, it is understandable that the panel were reticent to give a more uplifting view on the state of the CMBS market. But despite CMBS failing to have braved the dance floor in 2014, there is every sign that CMBS has a feel for the beat and that 2015 may be the year that we finally see CMBS throw some shapes.
Although CMBS issuance for 2014 was low compared to 2013 (the so-called CMBS revival year), nevertheless it was a hugely successful year for the product on the basis of the types of deals and structures that were tested in the market. The past year can in many ways be regarded as the year that the industry laid the foundations for re-establishing CMBS as a properly functioning financing tool for European commercial real estate (CRE). Indeed, if the dancing metaphor is further applied, 2014 was the year that CMBS successfully learned the basics in a remedial dance class. Notable developments in CMBS 2.0 during the course of 2014 include:
- the emergence of CMBS structures more closely resembling the CMBS 1.0 conduit style deals with multiple loans and multiple borrowers of CRE;
- an extension of the geographical landscape of deals with issuance of not only more CMBS deals secured by CRE located in the UK, Germany and Italy but new deals backed by CRE located in the Netherlands, France and Greece;
- an increasing volume of CMBS deals backed by secondary CRE;
- the tightening of spreads on CMBS notes; and
- a notable shift away from CMBS primarily being used to refinance properties to financing new acquisitions.
The solid foundations established during 2014 will no doubt be built on during the course of 2015 with deals secured by assets in new and more challenging jurisdictions and the CMBS 2.0 structures further refined and finessed. Given the prevailing market conditions, the outlook for CMBS in 2015 is extremely upbeat. On account of the continued low interest rate environment, the recent announcement of the ECB introducing large scale quantitative easing and investors’ relentless search for yield, CMBS is increasingly looking like a desirable proposition for the fixed income investor. Equally, there is a growing demand by borrowers for CMBS as it is regarded as a key financing tool to: (i) plug the funding gap between huge market refinancing requirements and available debt; and (ii) provide the much needed leverage (particularly in the case of yield-driven private equity buyers) to maximise equity returns on the acquisition of new properties.
Following the CMBS revival year of 2013 and the encouraging developments in 2014, it is my hope that 2015 will be the year that the CMBS product not only builds on the 2014 developments but also has the volume of issuance which the CMBS product justly deserves. Metaphorically speaking, CMBS is more than capable of hitting the European dance floor, it has got the moves, it likes the beat and most importantly the market demands CMBS to dance. Given the proven success of CMBS, its versatility as a financing instrument for CRE and the genuine demand for it as a funding tool, personally I don’t just want to see CMBS hit the dance floor – I want to see it win a contest!