Real estate market capital: sources and progress

By JLL Meghraj
In Q2 2009, investors started gaining confidence in the US economy by selling Treasuries and moving back into riskier assets. Investors’ growing appetite for risk is evidenced by the change in credit spreads. For example, in November 2008 yield spreads on the most-senior 10-year commercial-mortgage securities originally rated AAA were a record 14.26 percentage points by the first week of January 2010 they had contracted to 3.99 percentage points. By November 2009, new-issue CMBS had re-emerged in the United States with three deals pricing within a one-month period. While difficult to project CMBS volumes beyond this year, in 2010 we are likely to see volumes totalling less than $30 billion in the range of the mid-to-late 1990s. That said, there will be sharp differentiation between primary and secondary trades, suggesting that investors are carefully considering underlying collateral.
In Europe, the gradual return of the CMBS market in 2009 was evident in three major CMBS transactions done by Tesco Property Finance and Land Securities. However, to underpin a healthy real estate investment environment, the European CMBS market will need to recover much further. The challenge is that while further CMBS issuances are anticipated this year, they are expected to be at a low level. Although banks are being encouraged by government schemes to participate further in the market, there will be limited reliance on CMBS to spread the risk. Those that do occur will be uncomplicated “vanilla” deals characterized by low risk, high regulation and low leverage.
Existing bondholders across Europe continue to be nervous about the CMBS market because, in many cases, their exposures and outcomes of refinancing/extensions remain unclear and because the need to unravel exposures is likely to prove complex and time consuming. Meanwhile, banks in 2010 will be looking primarily to repair their balance sheets rather than originating new loans. Given these circumstances, 2010 will likely only represent the beginning of the rejuvenation process for the European CMBS market.