Read time: 2 minutes 20 seconds

The economic fallout of COVID-19 will be hugely significant for the European CMBS market, as a perfect testing environment has been created to truly examine the resilience and robustness of CMBS 2.0. Indeed, the impact of COVID-19 will be a true litmus test as to whether those structural reforms that emanated from the CREFC guidelines issued in November 2012 (Market Principles for Issuing European CMBS 2.0) and the investor principles of March 2013, have been sufficient to enable CMBS to not only weather the impending economic storm but to actually flourish.

Having considered a number of potential issues imposed by the impact of COVID-19 and in turn those mitigants put in place to stave off such risks (e.g. longer tail periods, existence of special servicers, loan level caps, cleaner loan structures), market participants should be quietly confident that the product is more than capable of weathering the COVID-19 storm. A clear nod to support this proposition is that despite the macro-economic uncertainty, BAML are close to issuing a c.£390m CMBS securitisation backed by UK logistics assets (Taurus 2020-2 UK). In other words, this issuance can be considered a massive endorsement of not only the likely robustness of CMBS 2.0 but also a clear indication that there is appetite for this type of fixed income product.

The true acid test though, is whether CMBS can flourish by demonstrating that it has a much more integral role to perform in financing commercial real estate than it has played since the GFC. Although it is far too early to say, CMBS does have the following important attributes which will inevitably put it in good stead:

  • It provides an efficient mechanism to transfer commercial real estate loan risk away from the banking sector;
  • It provides investors with a more liquid alternative to the loan syndication market;
  • It brings about much needed openness and transparency to the commercial real estate lending market;
  • When compared to banks hampered by provisioning and regulatory pressure, CMBS affords special servicers a lot more flexibility to work-out and enforce loans over an extended period of time.

Taking all these points together, it is clear that CMBS exhibits a number of hugely positive features, which is especially true when it is compared against balance sheet lenders. Also, given the public commentary on the performance of CMBS loans, the asset class has the potential to play a role in educating the wider market on what actions are being taken to resolve and address issues on problematic loans. Indeed, in light of the unprecedented and dynamic nature of the COVID-19 situation, this active flow of real-time market information could prove to be invaluable to the commercial real estate lending industry as a whole.

Ultimately only time will tell how CMBS fares, but if all of the above all holds true and the asset class not only weathers the COVID-19 storm but truly flourishes, then CMBS will rightfully re-establish itself as an important finance tool and once again earn itself a proper seat at the European commercial real estate finance table.