EUROPE - Institutional investors should invest in controversial and often highly geared vintage commercial mortgage-backed securities (CMBS) rather than their putatively more transparent successors, according to Cardano investment manager Richard Urban.
He told IP Real Estate that vintage issuances, in contrast to so-called CMBS 2.0, came with a history that showed investors how the underlying properties had performed over time.
"If you invest in new CMBS, you're putting all your faith in the future," he said.
In any case, there has been little new issuance as the market struggles to work out vintage CMBS, and the junior bondholders needed to create a functioning capital structure prove reluctant to invest.
"Junior investors may find themselves in a complex situation where the solution could involve managing property assets," Urban said.
"Often these are not equity-minded people - they're debt-minded - and they don't necessarily know what to do with the real asset."
In contrast to a US market that had already undergone the S&L crisis in the 1990s, the European market for CMBS was still in relative infancy when it failed and, as a result, lacked institutional knowledge.
"If you go back to the heyday of CMBS, there was very little knowledge within the bricks and mortar world of how CMBS worked," Urban said.
"Now bricks and mortar investors have been being forced to find out how CMBS works because the loans they borrowed from banks were placed into CMBS and have defaulted."
Advisory firm Cardano - which is looking in the US not only at CMBS but also at smaller and defaulted construction loans - said buyers of non-performing loans could create a return by solving problems that eluded the current loan-owner.
"It may be a large bank that doesn't have the capacity or skills to work through loans, and which will often prioritise by size, de-prioritising the smaller balance loans," Urban said.
"We're interested in situations where we're not competing with other investors and we can negotiate one-to-one basis about pricing.
"In the US, regional and local banks have a large exposure to real estate without the hands on deck to manage it. If you can assist regional banks, you can get into non-compete situations."
