CMBS in Europe 'is not coming back'

'For CMBS to work, it requires a bondholder that isn`t a bank,’ he said. ‘Investors in Europe don`t believe in it anymore. Part of the problem is that it's hard to find interest in a deal under €200 mln.'

The CMBS market in Europe has been practically non-existent since the onset of the last financial crisis, with very few securitisations taking place since 2008. As a result, the peak outstanding volume of loans as part of CMBS in Germany totals just €8 bn today, down from €40 bn in 2007, according to CBRE.

'CMBS is a less attractive product in today's environment for several reasons,' said Markus Kreuter, head of debt advisory in Germany at JLL. 'There's too much equity out there and there are other indirect vehicles, such as unsecured bond structures, to invest in which offer higher returns, compared to the investment grade tranches of a CMBS.'

The CMBS coupon level for the most senior tranches is too low to attract investors – and interest won't come back until it improves, Kreuter said. 'For example, an AAA-tranche with a margin of below 100 bps over mid-market swap rates would equal the coupon of that tranche given negative swap rates. In 2007, this coupon would have been in excess of 400 bps - in a higher interest rate environment,' he said.

Subsequently, investors are shunning CMBS because the return is too low to whet their appetite: 'If insurers need a 2% return today, they can't afford to go for a coupon that offers less than 1.0%,' Kreuter said.

In Europe, CMBS notes were typically sold to vehicles off the balance sheets with short-term funding, according to Dirk Richolt, head of real estate finance at CBRE in Frankfurt.  'They weren’t consolidated, which made them prone to collapse when the short-term funding market retrenched. The other problem with CMBS today is that with the ECB buying many bonds, the yield difference between CMBS and other fixed-income investments has grown to make them even more expensive on a relative basis. The latest deals are rumoured to not have been profitable for the originating banks and that is naturally the most important market test.'

CMBS generating 'marginal profit'
In February, Bank of America Merrill Lynch (BAML) launched the first – and thought to be only major - European CMBS of the year via the securitization of Blackstone's loan to acquire the Kingfisher retail property portfolio in Germany from bad bank FMS Wertmanagement.

The CMBS spread ranged from 130 bps over three-month Euribor for the Class A tranche to 240 bps over three-month Euribor for Class B notes. The Class E and F notes were sold at a 5.0% and a 6.8% discount, respectively. BAML retained a 5% stake in the underlying €317 mln loan, suggesting that the original loan extended to Blackstone was €333.7 mln. BAML is expected to make a 'marginal' profit, according to those who track the market.

However, in 2008, when Europe benefited from a booming CMBS market, typical spreads could be anything from around 33 bps over three-month Euribor for A1 or A2 notes to as much as 375 bps  over three-month Euribor for a riskier class C note, according to a report published that year from Barclays Capital.

Over in the US, it is a different story, according to Dixon, who notes that investors are on their home turf, so they feel more comfortable, and are generally more bullish. ‘It’s come back so strongly in the US because it's a good way to exit.’

The CMBS market in the US currently totals around $600 bn.