Analysts at Barclays expect overall stable to moderately declining values of prime properties in core European regions next year.
For the second half of next year, the bank expects higher investor and lender interest in German and UK “good secondary” properties, which could stabilise their performance, potentially increasing value.
Across Europe, it expects re-pricing of the secondary and tertiary markets to continue next year.
By all measures, the collateral performance of European CMBS worsened further this year. The main driver of European CMBS collateral performance was the repayment or non-repayment of maturing loans.
The CMBS market is polarising: while the best loans and borrowers are still leaving the European CMBS universe, the remaining non-performing loans increasingly become liquidating loans along with the respective CMBS liquidating transactions.
“We expect special servicers will aim to finalise the loan work-outs before CMBS maturity and hence, we expect increased liquidation proceeds and loss allocation in 2013-16,” said analysts.
The CMBS secondary market benefitted from its relatively high-yielding characteristics in a generally positive credit environment.
Continental European CMBS outperformed its UK counterparts, and first-pay European CMBS outperformed second- and third-pay classes.
According to Barclays: “For 2013, we expect the credit curve tightening trend in European asset-backed securities to continue, likely interrupted by times of volatility as a result of macroeconomic/eurozone headlines.
“This also holds true for European CMBS in general, given that even first-pay notes remain one of the highest-yielding investments in the ABS [asset-backed securities] sector. We note, however, that first-pay European CMBS prices have reached levels at which increased selling pressure could emerge.”
“For this reason and because first-pay European CMBS in particular increasingly competes with investments in commercial real estate loans and high-yield corporate bonds, we think a substantial further fall of discount margins and yields is unlikely.
“Given the current price levels and the concentrated nature of the asset class, loan underwriting is more important than ever for all parts of the capital structure, and for mezzanine and junior notes in particular. For mezzanine and junior notes, investors increasingly need to take the costs of loan work-outs into account,” said Barclays.
