Refinancing is 'a big issue in 2024' for maturing European CMBS deals, said rating agency Morningstar DBRS at its annual European Structured Finance Credit Outlook held in London.
Mirco Iacobucci, the agency's head of European CMBS, said: 'We have 16 deals - and there are some others that we don't rate - that face refinancing risk (this year)... refinancing is very challenging where portfolios are underperforming.'
The bulk of maturing loans fall due in May, July and August. The most difficult to refinance are expected to be those secured on office and retail, property types where Morningstar DBRS's collateral performance and rating outlooks are negative.
'Increased borrowers' debt costs, secular changes in office and retail sectors, geopolitical uncertainty and market volatility' are all potential headwinds, the rating agency said, adding that it believes office valuations are still falling.
Last year Morningstar downgraded more deals than it upgraded. Downgrades included Emerald Italy 2019, which is in special servicing and where the loan is secured on three Kildare Partners' shopping centres in Lombardy, where the last recorded valuation falls (April 2023) meant the LTV stood at 120%. Like some others, the floating rate loan is also unhedged.
Also downgraded was the loan in River Green Finance 2020, secured by the River Ouest office building in a secondary location in Paris, in Colombes in Bezon. Its borrower, LRC, recently defaulted.
One value-add German residential deal was among transactions downgraded, Morgan Stanley's €315 mln Haus (Eloc 39). Iacobucci's colleague and head of European structured finance, Christian Aufsatz, said that yields had moved out since 2021 when deals like Haus were financed. 'We have seen multifamily deals at 3% in major cities in the past which are not in line with interest rates any more and are struggling.'
Blackstone agreed a three-year extension of FROSN 2018 in a restructuring last month with the deal's special servicer Mount Street, after failing to repay when the loan matured in February 2023. The assets were originally 63 office and retail properties in Finland.
Iacobucci said that considering the maturity volume in 2024, 'we expect more borrowers to look for loan extensions, to try to weather the storm and wait for the anticipated reduction in interest rates and a recovery of the CRE market.'
For new issuance, 2023 was a very poor year. Morningstar DBRS didn't rate anything at all in the first half and then it rated three out of the four deals which banks successfully sold in H2.
The rating agency is more optimistic about new issuance for this year based on the premise that the momentum from H2 2023 carries on into 2024. Iacobucci pointed out that while interest rates are widely expected to stay higher for longer, swap rates are now less volatile: 'Stabilisation of interest rates and spreads may open further windows for new issuance.'
He said pricing for CMBS deals in H2 2023 had 'not been too bad, especially for logistics deals which aligned with where bank (finance) would have priced.'
For 2024, the firm predicts €3bn of issuance in up to six transactions, compared to only €1.3 bn in 2023. But it adds that the issuance might be €6bn if the macroeconomic picture improves.
In terms of new trends, Aufsatz highlighted data centres as an alternative asset class which could be financed via CMBS. 'It's an asset class which has seen a lot of issuance in the US, and I expect to see it in Europe soon', he said. 'There is strong interest from investors and pricing there is only positive.'
New issuance could also arise from borrowers using the securitisation market to refinance existing CMBS deals with Blackstone, the most active user of European CMBS, tipped to potentially do so.
The US investor recently demonstrated liquidity in the private banking market, for logistics real estate and strong sponsors, with its €7.5bn refinancing of Mileway's pan-European portfolio. As part of that refinancing, Mileway is pre-paying a €335 mln 2020 CMBS deal, Pearl Finance.
