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Irregular future for CMBS issuance in the Middle East

Global Arab Network - - Hannan Taha

Thursday, 03 September 2009 13:42

New issuances of commercial mortgage-backed securities (CMBS) in Europe, the Middle East and Africa (EMEA) are expected to remain sporadic, says Moody's Investors Service in its H1 2009 Review and H2 Outlook report for the sector. The full year issuance volume has been revised upwards by Moody's to €20 billion, levels still substantially below the volumes seen in 2005 to 2007. Moody's notes that there is some investor demand for credit-tenant-lease CMBS.

"In the first half year of 2009, issuance volumes were well above the full year of 2008 volumes. That was mainly driven by three retained transactions amounting to €11.4 billion compared to the total issuance volume of €14.7 billion for the first half year of 2009 and total issuance volume of €6.3 billion for the full year of 2008," says Alexander Zeidler, a Moody's Assistant Vice President -- Analyst and co-author of the report. Irrespective of the volume increase compared to last year's levels, Moody's notes that most of the CMBS transactions were retained and not placed with investors.

The biggest reason for still low open market issuance volumes in H1 2009 was the ongoing concern about the economies and the real estate markets in EMEA. "In H1 2009, the commercial property investment market showed limited activity, the occupational market was weak with reduced tenant demand and banks continued to hold real estate lending activities at very low levels," says Jeroen Heijdeman, a Moody's Analyst and co-author of the report.

The commercial property markets across all European countries and property types experienced continued value declines in the first half year of 2009. The value decline was most pronounced in the UK in the first quarter of 2009, but other main CMBS markets like France and Germany also experienced value deterioration.

The value declines were not only driven by yield widening, but also rental value declines. The trend of widening yields slowed towards the end of the second half year for selected prime commercial properties in the UK that feature strong lease profiles. Moody's expects the trend of declining rental values to continue in H2 2009 and that most EMEA commercial real estate markets will show some improvement in 2010. Moody's expects moderate property value increases from 2011 onwards. A material recovery of commercial property values over the next five years is unlikely, in Moody's view.

The rating agency believes that the focus in H2 2009 will remain on the performance of existing transactions and predicts that the adverse loan performance trend will accelerate, depending on the state of the economy and the availability of capital to refinance commercial real estate loans.

Moody's expects new retained CMBS issuances in H2 2009 and expects continued interests from investors for credit-tenant-lease securitisations as seen towards the end of H1 2009. Looking beyond 2009, Moody's expects that the capital markets will still play an important role in financing commercial real estate. This is needed in order to close the financing gap arising from significant loan refinancing volumes due over the next years while banks are reducing exposure.

The future shape of CMBS transactions will not be decided soon, but investor demand will likely focus on single-loan CMBS and granular CMBS transactions that are less complex.

Global Arab Network

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