2013: Fitch sees tough year ahead for CMBS market
With more than 70% of EMEA commercial mortgage backed securities (CMBS) loans maturing in 2012 not repaid, signs are the 2013 will be a tough one for refinancing of such loans, according to Fitch Ratings.
Evidence of new entrants in the European commercial mortgage market is growing, with several senior debt funds in the process of raising equity and large insurance companies also targeting the sector. However, institutional funds will not fill the gap left by banks as long as the focus is on the higher-quality properties.
Only 24 out of 122 loans that matured in the first 11 months of 2012 were fully paid at maturity. A further 12 were fully paid after maturity, and one was repaid in full following a breach in representations and warranties which obliged the originator to repurchase it. Of the remainder, 31 are in workout, 29 are in standstill, and 20 have had their maturity extended. Three have already suffered losses. The 2012 maturities dwarfed the previous peak in 2011, with more than twice the number and almost three times the aggregate loan balance coming due.
The recorded additional maturity outcomes to date provide useful insight into the difficulties facing borrowers of maturing loans in the short to medium term. With 227 loans accounting for EUR31.9bn maturing in 2013 and 2014, refinancing and timely repayment will remain challenging. As in 2012, the key constraint for CMBS servicers handling defaulted loans in the next two years will be the limited amount of debt available to finance non-prime assets that secure the majority of the CMBS portfolio.
Furthermore, several loan workouts over the past 12 months suggest that weaker assets are subject to significant obsolescence risk, which, in the most extreme cases, can reduce market values to a mere fraction of the original appraisals. This is particularly concerning for single-let properties littering the CMBS portfolio where tenancy risk is the central concern, especially as medium-sized corporates continue optimising their use of sites across Europe. Generally, a strong tenancy profile is increasingly a prerequisite for lenders considering debt financing.
Even where collateral and loan performance have been stable, other considerations are coming into play. One is collateral jurisdiction, with properties in countries seen as vulnerable to the eurozone debt crisis, such as Spain and Italy, enjoying little investor demand, and next to none from foreign buyers.
The approach of CMBS legal maturities will intensify the pressure on servicers working out loans, making forced sales more likely and potentially pushing down prices further. Sixty-six loans falling due in 2013 or 2014, with a total outstanding balance of EUR16.2bn, have to be resolved within three years of loan maturity. For 16 loans, with a balance of EUR2.7bn, the gap is less than two years. While refinancing risk weighs heavily in Fitch’s CMBS ratings, the added time pressure may lead to further downgrades in these cases.