The placement last week of a commercial mortgage-baked security by the London branch of Deutsche Bank sent a signal to the market that CMBS is once again emerging as a credible source of debt capital. The ₤302 mln (EUR 334 mln) facility marked the first European CMBS public offering since the credit crunch erupted in 2007.

Banks will be hoping that the issuance, which has been packaged as a DECO 2011-CSPK vehicle, will spark a renewed interest in the European CMBS market, which has virtually disappeared since the onset of the financial crisis. The new issuance is backed by a ₤302 mln loan made to Blackstone to fund its ₤480mln acquisition of the Chiswick Park Estate, a nine-building business park in West London. The acquisition was also funded by a ₤60 mln mezzanine loan from GIC, Singapore's sovereign wealth fund.

‘Other players have been waiting in the wings for Deutsche Bank to do this deal as it’s been on the cards for some time,’ Paul Lloyd, head of loan and special servicing at CBRE in London, told PropertyEU. ‘It sends a message to the market that there is an appetite for CMBS again. As this is the first CMBS public offering since 2007, it was important that the structure be simple, with a good sponsor - which this is,’ he added.

Other CMBS issuers are now likely to be mulling offerings of their own. RBS is believed to be considering a couple of CMBS deals, according to market insiders. UBS in London is also looking to place a CMBS this year, insiders say. Both RBS and UBS declined to comment. Meanwhile Deutsche Bank is believed to be considering a multi-borrower CMBS issue that it is expected to place before the autumn, although it is unclear how large this is, Lloyd of CBRE added. Deutsche Bank declined to comment.

There is around EUR 2 tln of commercial real estate debt across Europe, including the UK, of which around EUR500bn needs to be refinanced over the next two-to-three years, Paul Crawford, an asset-backed strategist at RBS in London told PropertyEU. ‘CMBS has always been a small portion of this, accounting for about 10% of commercial real estate debt in Europe (70% is bank debt with the remaining 20% in the form of covered bonds). There’s a significant refinancing wall in 2011 to 2013 and CMBS is part of that,’ he said.

In a further sign that the European CMBS market is re-emerging from the shadows, a committee was set up by the Commercial Real Estate Finance Council - Europe in London six weeks ago to look at the CMBS market across Europe. Known as CMBS 2.0, it brings together experts from different areas of the industry to discuss how to attract investors back into the CMBS market and what needs to change in the structuring of the new issuances.

The aim is to iron out some existing problems, Lloyd, who is a member, told PropertyEU. ‘One thing that I would like to see change is the ability to be able to
remove a primary servicer, which isn’t possible at present, unless they are negligent in performing their role. The other key issue is fees. For example, on a ₤4mln deal, if the fee is 25bps, it’s just too small to make servicing the loan economically viable for the servicer. Conversely, on a big deal, if the fee is 1% of the total size, it could end up being ₤10 mln or more, which is too much. There’s a need to find a happy medium,’ he said.

In any case, CMBS is unlikely to supplant the Pfandbrief market as one of Europe’s favourite refinancing options, Paul Crawford, an asset-backed strategist at RBS in London told PropertyEU. ‘As a refinancing tool, it struggles to compare competitively with Germany’s Pfandbrief market, bank lending and new money coming into the sector from insurance companies lending directly, purely due to it being relatively expensive,’ he said.

Another possible dampener is that changes to the capital requirements directive under Basel II stipulate that the originator of the facility has to retain 5% of the risk. ‘For most lenders, this isn’t an issue but if investment banks have to retain 5% of each CMBS issuance, for example, that might not work for them. The downside is that this makes CMBS less competitive and means that the recovery of the new issue market will be slower,’ Sri Sankaran, head of European ABS strategy at Morgan Stanley in London, told PropertyEU.