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European CMBS Becoming a Worry

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European CMBS Becoming a Worry

By - Thursday 06 December 2012

As the US Mortgage backed securities trade looks set to hit a year-to-date total of $40 billion this week according to Standard and Poors, fledgling reports of a European CMBS revival have hit the wall of cold hard reality.

According to new figures from ratings agency Fitch 70 per cent of the European commercial property loans that were at the heart of securitisation deals structured before the financial crisis have not been repaid at maturity.

According to the report only 36 out of 122 CMBS loans maturing in the first 11 months of this year have been repaid (24 at maturity and 12 after), the rest have either been extended or are in a workout – some are at a complete standstill.

The story of the financial crisis has been one of divisions, widening cracks if you will. Some markets are recovering while others die, regions and even sub-sectors within markets outperforming in their areas or sectors, the likes of London and New York booming while the rest of the UK and US languished in difficulty, although the latter is now turning around more widely.

Just last month positive reports boomed out as JPMorgan bought three quarters of the first European commercial mortgage bond launched since the financial crisis. The financial times called it a “deal that heralds the return of a vital source of funding for the continent’s cash-starved property market”. Unfortunately it was a short-lived return.

As banks continue to distance themselves from real estate amid the new regulations about capital requirements and such like, it has become increasingly difficult to refinance European commercial property loans, including those contained in CMBS vehicles. Insurance companies looked set to plug at least some of the gaps left by the banks, but they have proven to be only interested in the crème de la crème of assets in the best locations. Indeed, even the JP Morgan purchase was a wisely chosen one, as the bond was backed by a portfolio of property in safe-haven Germany.

A record €31.9bn of CMBS loans are due to hit maturity in the next 2 years making the situation even more concerning. The Fitch analysts said hitting maturity dates and redeeming debt via refinancing or asset sales was likely to remain particularly challenging, especially for deals backed by secondary quality assets and those in countries such as Spain and Italy where there were few buyers for real estate debt.

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