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Thus far CMBS has had a storming year and all current indicators point towards 2018 being a bumper year for the product. After two years of relative malaise on the primary issuance front, the first half of 2018 has proven to be anything but sluggish. Notable transactions that have so far taken place include Citibank and Morgan Stanley closing an extremely well priced transaction secured by Finnish assets (a CMBS 2.0 first), Bank of America Merrill Lynch achieving some hugely impressive pricing on an Italian CMBS and most recently the spotlight has turned to Goldman Sachs who have recently obtained excellent pricing on a £427m CMBS secured by a portfolio of UK hotels. The market though has not simply been confined to conduit deals as demonstrated by the fact that Blackstone successfully closed CMBS Pietra Nera Uno (which is apparently the first of a swathe of Agency CMBS deals that Blackstone are expected to bring to the market) and the recent market rumours that Natwest are currently in the midst of structuring a synthetic CMBS. Taken together all these transactions provide the firmest indicator yet that that the beleaguered CMBS product is firmly back in vogue.
In our view, the inflection point for the latest surge in activity can be said to stem from BAML’s hugely successful Taurus 2017-2 UK and Taurus 2017-1 IT transactions which closed at the end of 2017. Not only did these deals breathe fresh life into an otherwise sanguine market but the pricing achieved provided market participants with a very stark reminder that with the requisite macro-economic conditions and a healthy dose of investor demand, then CMBS can really be the ticket. The recent spate of deals not only re-affirm and endorse this message, but in fact positively demonstrate that CMBS not only has a role in financing European commercial real estate but the fact, that it can be extremely profitable for those market participants (borrowers, arrangers and fixed income investors alike) that wish to embrace this technology.
The great news about this recent surge in activity, is not only the fact that a number of different arrangers are sitting behind these issuances but also the fact that these transactions feature different underlying asset types from a range of different jurisdictions. However from our standpoint what is most encouraging about this recent spate of activity, is the fact that European CMBS is making this resurgence notwithstanding the bout of European legislation that has penalised the product. Although at times we have considered this penal legislation potentially fatal (CMBS – the little match girl of European ABS) fortunately market activity has proven that this is simply not the case.
For the erstwhile industry participant, this is not the first time that we have had the pleasure of riding a CMBS 2.0 wave, indeed 2015 was proving to be an extremely prosperous year until the summer when the threat of Grexit followed by the Chinese financial crisis brought primary issuance to an unexpected crashing halt. Although a sobering thought that the market will only be too aware, nevertheless it is our hope that arrangers continue to “make hay while the sun is shining”. Who knows, barring another macro-economic shock, then 2018 may not only be regarded as a truly momentous year for the product, but also go down as the year that CMBS rightfully re-established itself as an important financing tool for European commercial real estate.