A European market for property debt securitisation is proving to be difficult to get off the ground.
Teams of well-paid US investment bankers have been crossing the Atlantic, looking to establish real estate debt securitisation in Europe. Back home, commercial (and residential) mortgage-backed securities are big business: a $44bn market last year.
In the US, the technology to turn real estate loans into pieces of investment-grade paper is well established. Indeed, the banks have specialised units – conduits – that bundle up pools of mortgages purpose-made for securitisation. There is a well-established market of institutional and other investors for these securities, whose ratings can range from the super-secure AAA to riskier B categories.
The logic for looking to securitise in Europe is impeccable. The continent offers a market of similar size to the US. There are large collections of real estate – in both public and private hands – ripe for financial engineering. The potential investors are there, too. And with European monetary union on the horizon, currency risk is much reduced.
But despite the Wall Streeters’ best efforts, the European market has been slow to take off. Gathered in Cannes last month for a symposium on global commercial and residential real estate finance and securitisation, the financiers’ frustration was palpable.
As Detlef Schloz, a principal analyst with Moody’s rating agency in London, pointed out, to date there have been only around $3bn worth of European mortgage-backed securities. Most of these have been Libor-linked, one-off deals, like those for Canary Wharf in London or La Défense in Paris.
The UK and France are the only European countries to have securitised commercial property; in other countries, issues have been largely backed by residential property.
The main stumbling block – mentioned repeatedly by speakers at the symposium – is that there is currently no shortage of capital for commercial property in Europe. “Securitisation is really not needed in this market – but the market is changing,” noted Chris Nordeen, managing director of RFC Mortgage Services, part of GMAC.
“In Europe, bank lending is competitive and flexible,” said Steve Roth, chief executive officer of Secured Capital, a Los Angeles-based real estate investment bank active in France.
Whereas in the US, the CMBS market developed as the answer to a credit crisis, in Europe, there are plenty of lenders. German mortgage banks, for example, have been growing their business outside their home country.
Thus, would-be securitisers have found they cannot make their numbers stack up: other forms of finance are cheaper. “Are European lenders mispricing risk?” Roth wondered. Chris Nordeen certain believed so: “I don’t think UK lending is sustainable because margins are too low, and are crushing the return on capital.”
Another problem faced by US (and other) securitisers, is Europe’s tradition of “relationship” banking. On this side of the pond, banks have long-standing ties with their clients; they are reluctant to jeopardise these by packaging up loans and selling them on.
Roth also stressed the need to develop European appetite for high risk/low security paper – the bottom 10-15% tranche of a securitisation that is most at risk. “It’s easy to move triple-A rated paper, but you need to develop the market for the B piece,” he noted.
Tamara Adler, managing director of Deutsche Bank in the UK, thought the improved regulatory environment was helping to drive the European CMBS market. Germany has recently changed its legislation, making securitisation by banks possible, and so has Switzerland. New legislation in Spain and Italy is also expected to impact next year.
“Pressure on European financial institutions to increase the return on earnings and regulatory pressure on capital will also help the market develop,” Adler said.
Indeed, though CMBS issuance is back-pedalling in Europe this year – volumes are down – most speakers were optimistic about the future. Julian Allen a director of Goldman Sachs in the UK predicted “dramatic growth” over the next two to three years.
“There will be more securitisations to free up the capital base as banks get hit by Russian and Far Eastern exposure – though these will tend to be corporate loans rather than mortgage-backed securities,” he said.
Allen saw potential coming from government and corporate hiving-off of property assets.
“The UK is ahead, but it is spreading to the rest of Europe. This may lead into securitisation, eventually,” said Allen.
European monetary union was also considered a big plus. “EMU will help put different countries’ securitisations on a level playing field – the scale will help the existing market grow to a new level,” said Mark Silverstein, managing director of BEA Associates, part of Credit Suisse Asset Management. As Phillip Evanski, a senior vice-president of Donaldson Lufkin & Jenrette noted, assets across Europe will be in a single currency. “Eventually they could be combined in a single pool,” he said.
The Global commercial & residential real estate finance and securitisation symposium was organised by Information Management Network, tel +1 212 768 2800
