Increased demand for European commercial mortgage-backed securities has lead to tight funding levels on new issuance as well as spread tiering between deals backed by U.K. and European assets. The uptick in interest comes from investors buying into European CMBS for the first time, says a London-based real estate specialist. Euro deals are pricing tighter than their U.K. counterparts because investors are concerned about the London commercial property market, he adds.
The increased interest in euro-denominated CMBS is also partly a function of the development of the asset class in Europe, say bankers. Earlier this year, Lombard, a euro-denominated deal backed by European assets priced in the mid-40s over EURIBOR. Now, similar deals such as Paris Residential and ELOC 17 are being priced inside the 40 basis point mark. However, sterling-denominated deals backed by U.K. assets aren't faring as well. Opera, a recent sterling deal, was priced at 50 over LIBOR.
The European CMBS market should double next year to $20 billion, according to research from Morgan Stanley. Much of the increased issuance will come from the new real estate conduits that have been set up over last 18 months as well as from a E1 billion deal from the Italian government.