The European commercial mortgage-backed securities market is booming. Close to E3.2 billion in CMBS has been sold this quarter--which is 10 times last year's first quarter total and double the amount sold in the first half of 2003--and issuance looks set to maintain this torrid pace. "There are a lot of banks and dealers ramping up deals, and borrowers who have traditionally looked to the bank market for loans are now looking at CMBS lenders," says Jonathan Pollack, head of CMBS trading and syndication at Deutsche Bank.
Issuance has been picking up since the end of last year, but it has accelerated of late, as originators are turning to the securitization market more frequently. Several factors are causing the increase in issuance. Firms such as Lehman Brothers have been setting up conduits, and improving corporate credit sentiment is leading to better investor reception for CMBS, according to an analyst.
At the same time, spreads on five-year, triple-A European CMBS have come in to under 30 basis points over three-month EURIBOR, from 45 basis points six months ago, and some observers say they could go tighter despite high levels of new issuance. "The tightening in CMBS spreads has been quite spectacular and judging from the strong market tone and improving technicals in this sector, I believe spreads can tighten even further," says Ganesh Rajendra, managing director and head of securitization research at Deutsche Bank. He notes that the European CMBS market is still developing, and thus pricing remains supply-inelastic and higher issuance alone is unlikely to put pressure on spreads given that investor demand for the paper remains solid.
CMBS pros attribute this demand to new investors looking for yield as spreads on other structured finance investment tighten. "Every CMBS deal has new investors and I'd say that the rate of new investors entering deals is accelerating," says Pollack.
The supply picture can be misleading, though, since refinancings make up part of the total. Pollack points out that despite the abundant first quarter issuance, if repayments by larger issuers such as Canary Wharf and Morgan Stanley are netted out, supply in the first quarter was effectively flat. "There are lots of people out there at the moment with paper to replace," he adds.