Ten public European CMBS transactions were issued in the first half of 2021 for EUR 3bn, while 46 transactions worth EUR 15.3bn have been publicly issued since 2018. Before Covid, CMBS originators offloaded pro-cyclical assets by issuing retail and hospitality CMBS.

“Arrangers reopened the market in the second half of 2020 with assets perceived to be winners of the outbreak, such as logistics and residential,” said Florent Albert, a director in Scope’s structured finance team and author of today’s report. “They have continued to issue logistics CMBS in 2021 as well as deleveraging out of non-prime assets and sectors with an unclear future, such as office or UK retail. We expect affordable housing and UK buy-to-let CMBS to be issued soon.”

On the underwriting side, the European CMBS is oligopolistic: three US banks account for 67% of issued volume while Blackstone dominates the sponsor side with a 49% market share. The domination of US arrangers and sponsors favours the emergence of US underwriting standards in Europe. For example, cov-lite securitised CRE loans characterised by the absence of financial default covenants prior to a permitted change of control represent 50% of issuance and have become the norm for CMBS sponsored by Blackstone. The share of securitised interest-only loans has also grown, increasing refinancing risk.

Originate-to-distribute lending models dominate European issuance, with agency-style CMBS characterised by single asset/loan and/or single borrower deals accounting for up to 90% of 2021 volume. “We expect conduit and significant risk transfer transactions to remain exceptions due to the fragmented European market with different real estate laws and currencies and the limited investor appetite for these more complex transactions,” said Albert.

Pricing post-Covid has been resilient: most investment-grade classes have flattened out and are close to pre-Covid levels. Investors are eager to invest in CMBS to deploy their abundant liquidity in inflation-hedged real estate without regulatory constraints, particularly since they can earn a significant margin premium versus other assets through the capital structure.

“CMBS arrangers see the market reopening as an attractive alternative source to syndication to deleverage their balance sheets. They can also keep the spread between CMBS weighted-average funding costs and securitised CRE loan margins via CMBS interest-only pieces,” Albert continued. This premium has risen to 120bp in 2021 from 90bp in 2020.

Sponsor appetite for this cheap source of financing is growing, too, as they are keen to take pricing risk through the emergence of the weighted-average margin note mechanism in pricing of the loans.

Download Part 1 of this two-part CMBS series here. Part 2 will focus on the wave of European CMBS rating downgrades since the start of the pandemic and provide a rating decomposition by asset class and financial metrics.

Join us for a webinar on Wednesday 28 July at 15:30 CEST, where Florent Albert will present a review and outlook for European CMBS and take delegate questions. Register here to attend.