Sunday marked the fourth anniversary since Deutsche Bank successfully brought to market Deco 2011-CSPK (“Chiswick Park”).  As many market observers will testify, this was a defining moment  for the European CMBS market as it not only marked the return of true primary issuance but the transaction included structures that were designed to overcome many of the structural flaws that were inherent in the CMBS 1.0 vintage of notes.  In effect Chiswick Park, along with the CREFC guidelines issued in November 2012 (Market Principles for Issuing European CMBS 2.0) and the investor guidelines set out in an open letter signed by fifteen CMBS investors in March 2013, can be credited with heralding the dawn of a new era of CMBS deals (“CMBS 2.0”).

Despite the huge success of Chiswick Park and a handful of deals that followed in subsequent years, disappointingly these transactions did not precipitate a sudden surge of primary CMBS activity.  In fact, had it not been for the securitisation of three mega German multifamily loans, the level of CMBS activity from 2011 through 2013 would have been almost invisible.  Although in quantitative terms these German multi-family deals gave CMBS 2.0 a huge boost, it was not until 2014 that the European market managed to build on the success of Chiswick Park and lay the foundations for properly re-establishing CMBS as a fully functioning financing tool for European commercial real estate (“CRE”).  Notable developments in the product achieved during 2014 were considered in my blog “CMBS – it’s time to dance to the beat!”.

With regard to those deals that have been brought to market so far this year, it is notable that many of the solid foundations that were put in place during the course of 2014 have continued to be built on, with:

  • RBS and JPMorgan joining the exclusive club of CMBS 2.0 arrangers that have launched deals in the European market;
  • JPMorgan delivering another CMBS 2.0 first (Mint 2015 PLC)  – a multicurrency deal backed by real estate located in multiple jurisdictions; and
  • Ireland (Deco 2015-Harp) and Spain (Silverback Finance CMBS) joining the ever increasing pool of jurisdictions where CMBS has been used as a funding tool for CRE.

However despite the CMBS market’s ability to refine and finesse CMBS 2.0 structures to meet investor, borrower and arranger needs alike, issuance levels have remained low with just over €3 billion issued in the first six months of the year.  Given that CMBS has a vital role in creating a sustainable, resilient, yet diversified CRE debt market and is the only funding tool that can distil CRE debt risk out of the banking system, it is disappointing that the European CMBS market has not witnessed a significant rebound in the volume of issuance.  There are though a myriad of reasons for this, many of which were explored in an article I recently had published in the summer edition of CRE Finance World (CMBS – some crystal ball gazing).

As part of this CMBS crystal ball gazing exercise, I reached the view that the outlook for primary issuance will remain subdued in the short to medium term given the record low interest rates and the lack of standardization of regulations that apply to shadow banks.  However I believe that this rather downbeat forecast will soon change, when we are confronted with a lending market dominated by rising interest rates and with it, the return of more fertile conditions for CMBS issuance.  In essence, although market participants in the CMBS arena can be forgiven for being disappointed with the quantum of issuance, nevertheless such participants can take solace in the fact that CMBS has proven itself as a financing tool for CRE that is here to stay!