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Analysts predict up to €8bn in CMBS issuance levels next year after slow 2014

Primary issuance of new European CMBS transaction is forecast to more than double on 2014’s disappointing €3.5bn in annual volumes, although the annual forecasts so far published fall short of 2013’s revival year.

CoStar News has collated four annual European CMBS forecasts by investment banks for 2015, which range from between €5.0bn and €8.5bn, ahead of this year’s €3.5bn but just below 2013’s €8.6bn.

Of the 2015 CMBS issuance forecasts so far published, BAML is the most bullish, predicting €8bn in new securitisation transactions next year.

By comparison, Morgan Stanley has forecast €6bn for new issuance, while JPMorgan is expected to issue an annual CMBS forecast of between €5bn and €7bn later this week.

Barclays Capital, which along with Morgan Stanley published its annual European ABS outlook today, offered two separate forecasts, subject to the level of the European Central Bank’s asset backed securities purchase programme (ABSPP), as confirmed in October.

In its base scenario, BarCap forecasts CMBS issuance of €5.0bn without ABSPP, rising to €6.0bn including privately placed bonds. Including ABSPP, BarCap raises its forecast to €7.5bn and further to €8.5bn when privately placed bonds are included.

Deutsche Bank and Nomura are expected to publish forecasts before the end of the week.

The range of issuance forecasts – so far – is actually relatively tight between the banks’ ABS research teams, particularly given that BAML’s forecasts are inclusive of privately placed bonds while Morgan Stanley’s are not.

BAML reports that “CMBS has made a permanent return to the CRE debt finance landscape” with additional headroom to grow.

In a positive for the sector, BAML points to the return of originators warehousing loans and a greater acceptance of complexity among investors, including multi-borrower conduit deals and a wider variety of property type and quality.

Seven of the 12 new CMBS transactions issued this year – including Deutsche Bank’s yet-to-price BONN transaction – were backed by secondary assets, compared to just two out of 13 transactions in 2013.

Deutsche Bank’s €679.9m DECO 2014 BONN CMBS transaction, the final currently confirmed securitisation for the year, is secured by 29 offices throughout Germany owned by IVG Immobilien and valued at €983.7m.

“CMBS sponsors most often have been private equity funds that are financing acquisitions of relatively distressed, higher-yielding assets frequently in peripheral European countries from sellers that are motivated by financial distress or are transitioning out of markets that are no longer core to their strategies,” wrote BAML’s Mark Nichol.

“The transfer of non-core properties from motivated sellers to yield-driven private equity buyers is a large theme that may play out over several more years, in our view.

“As asset yields continue to compress, borrowers appear to be becoming more cost focussed to support equity returns. We heard fewer borrowers proclaim the ‘importance of banking relationships’ this year and suspect the appeal of borrowing via CMBS may increase in 2015.”

Morgan Stanley’s Srikanth Sankaran and Vasundhara Goel wrote that the improvement in CRE backdrop has helped the maturity outcomes on legacy CMBS loans.

“Of the €10.1bln of loans that matured this year, a strong 49% repaid, mainly on the back of payments from some big-ticket loans like Coeur Defense and More London.

“However, the key spill over into CMBS has been in the form of faster resolutions of defaulted loans. In 2014, loans worth €1.2bln moved into special servicing mainly due to defaults at maturity while loans worth nearly €4.8bln were worked out. This is the first time in almost four years that loan resolutions have outpaced new defaults.

“Looking ahead, 2015 is light on the loan maturity front with only €3.5bln of loans coming due. Thus we think that the rolls into special servicing are likely to slow down further next year, but the existing inventory of NPLs should keep special servicers busy.”

There is currently €66bn in outstanding European CMBS, of which €42bn is sterling-denominated and €24bn is euro-denominated, down from an aggregate of €136bn in 2009, according to BAML.

“There is roughly €8bn of loans that are overdue in outstanding European CMBS transactions, the remnants of around €55bn of legacy CMBS loans that came due between 2011 and 2014,” added BAML’s Nichol.

“These overdue loans are in transactions whose legal final maturities mostly fall between 2016 and 2020. As such, we expect these overdue loans to be worked out, liquidated or repaid over the next two to five years.”

Gauging the ECB’s appetite as an ABS investor

At the macro level, the elephant in the room for ABS markets in 2015 is the uncertainty over the scale of the ECB’s investment appetite in European CMBS.

The measure is intended to pump liquidity into the Eurozone market in an effort to stave off a deflationary spiral.

“Trepidation sets in when considering the rationale for the ECB’s involvement in the securitisation markets,” writes JP Morgan’s Gareth Davies, Flavio Marco Rusconi and Suraj Dey.

“Rather than being primarily concerned about the dislocation of securitisation per se, we characterise the ECB’s willingness to engage with securitised bonds as being symptomatic of a broader private sector Quantitative Easing (QE) programme.”

BarCap was equally sceptical, calling the ECB intervention “too little too late”. BarCap’s Christian Aufsatz wrote: “The focus on senior bonds reduces securitisation to its funding function; yet regulators failed to create a level playing field compared with other asset classes.

“We continue to be concerned that regulatory initiatives will make the use of ABS as a capital management (and deleveraging) tool – and, hence, an instrument to reduce the real economy’s dependence on bank funding – economically unviable.”

The investor universe for CMBS continues to face regulatory headwinds which could ultimately reduce appetite over time driven by an increase in the allocated capital required for investment, warns JPMorgan.

JPMorgan added: “Insurance investors are notably challenged by the adoption of final Solvency II rules, while bank investors await the final determination of the Basel Committee. Accounting for two-thirds of the asset class’s investors, we expect regulatory revisions to continue to retard investor engagement levels.”

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