Indeed, in today’s market, had securitisation been more widely adopted, we would be in a far stronger position to make a reasoned assessment on the state of CRE. After all, securitisation through the public transmission of real time information has a role to play in educating the wider market on not only the performance of loans but also what actions are being taken to resolve and address issues when securitised loans become stressed. When it comes to the tracking of performance of loans and the CRE that they finance, securitisation can act as a beacon of best practice and be an educator in its own right. In addition there is a real time ongoing obligation on the securitisation issuer to make disclosures about any material events that are likely to have an impact on a loan and the underlying CRE. Following note issuance, ongoing reporting, in the form of quarterly reports, allows the market to regularly track performance. After all, ahead of any note issuance, a prospectus is issued that provides comprehensive information about not only the loans but also the CRE that secures such loans. Regardless of whether a public securitisation takes the form of CMBS or CRE CLO, the bottom line is that transparency and openness are in bountiful supply. This unjustifiable opaqueness is not only a flaw in the lending market but is also a major advertisement on the huge merit that securitisation can play as a tool for financing CRE. This lack of transparency is not only hugely unhelpful but allows market harbingers to provide negative speculation, which for an industry both buoyed and sunk by sentiment, is truly toxic. In an ideal world this information should be readily available for all to digest and be used to form educated views on whether CRE is indeed the next domino to fall or otherwise. This is an issue of profound frustration and denotes a major flaw in the European CRE lending market. The crux of the issue is the inability to confidently determine the current state of the CRE market and, more importantly, whether it is managing to weather the macro-economic storm. Despite the challenging headwinds, the CRE market should be confident with its ability to weather the current macro-economic storm given the more conservative underwriting and improved loan structures. Leverage levels are more conservative compared to the crazy levels reached prior to the GFC and sponsors have a lot more skin in the game and therefore less inclined to unceremoniously hand over the keys at times of distress. Generally speaking, loan structures are a lot cleaner and easier to enforce. However, those looking to draw parallels with the global financial crisis (GFC) will be sorely disappointed as the debt secured by CRE is a very different beast to what we saw being originated in the noughties. This brief epilogue of the perils that CRE is currently facing is sobering and provides clear justification why many believe that CRE is in the firing line. Meanwhile these factors have had a cooling effect on the sales market with it becoming harder to price CRE. The corollary of which, is that existing financings are under greater stress and refinancing’s have become more of a challenge with an increasing need for fresh equity injections and/or higher leverage to make such transactions viable. ![]() This is a fair conclusion to reach given the tremendous headwinds that CRE is currently experiencing on account of cap rates, interest rates, operating costs (including fuel prices) and financial costs all following an upward trajectory. Although the health of the banking sector has been the primary focus in recent months, market observers have been keen to identify the next domino to fall amidst this turmoil and chief amongst the potential candidates has been CRE. Indeed, as demonstrated by the recent financial turbulence, the ability to shine a spotlight on this traditionally opaque market yields dividends when it comes to assessing the true impact and ramifications that the challenging macro-economic outlook is likely to have on the performance of CRE.Īt this point in time, it would be fair to say that the capital markets are jittery to say the least, thanks to the severe impact of interest rates rising at a relatively rapid rate and the unprecedented demise of a handful of banks. ![]() ![]() Simply put, no other source of CRE finance can provide the high level of openness and transparency that can be afforded by securitisation. One unassailable fact is that securitisation has a hugely important role to play when it comes to financing commercial real estate (CRE). By Iain Balkwill on Posted in ABS, Commercial Real Estate, CRE CLO
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