How CMBS can be an attractive market to foreign investors!

CMBS Witnessed a Strong Second Half

A rule ordered in December 2014 under the Dodd-Frank Wall Street Reform and Consumer Protection Act required that sponsor of asset-backed securities to keep some of the value of new securities, rather than offloading all the risk to investors. These risk retention rules for asset-backed securities included collateralized loan obligations, Commercial Mortgages Backed Securities, and all other non-residential asset-backed securities. Prior to this, the CMBS lenders and borrowers anticipated that these regulations might run small lenders out of the market. The lenders were expected to become overly conservative, making it increasingly difficult to find financing for commercial real estate transactions (especially in secondary and tertiary markets.) Surprisingly, despite these less-than-optimistic predictions, CMBS loan volume gradually increased. In fact, as quoted by CBRE, CMBS issuance reached $38.8 billion at the end of the second quarter. Not only the big lenders, but also a good number of small lenders operated in the CMBS market. Industry experts shared that they are expecting more small lenders to enter the market by the end of the year.

If we go by market predictions, CMBS issuance is expected to reach a total of $70-75 billion by the year-end. It is the sufficient availability of capital coupled with competitive rates that have made CMBS loans such attractive. For financing commercial assets, the borrowers are still depending heavily on CMBS loans. Though there have been slight changes from lenders in their underwriting and the way they are pricing deals, the CMBS market remains a viable capital source for many owners and investors.

The changing landscape of CMBS market

The market players say that CMBS still wins deals in which borrowers want the most proceeds and the longest term. While most of the commercial banks typically prefer terms of less than seven years, CMBS gets an advantage because of 10-year term length. CMBS has always been more dependent on market forces. CMBS is also trying to comply with new rules. On the same hand, the market is still finding a way of originating loans (with attractive pricing and terms) that will attract both the borrower as well as the increasing number of choosy investors.

If we look at the figures released by a research firm Trepp LLC, US CMBS issuance reached $21.2 billion in the second quarter of 2017. It is more than doubling the volume achieved in the first quarter of the year. Loans on office and hotel properties accounted for the largest share of CMBS loans issued in the second quarter, at 27.2 percent and 20.46 percent respectively. As per Trepp, factors like low-interest rates, tighter bond spreads,  issuers’ growing level of comfort with risk retention rules, etc. have been collaboratively responsible for a more energized market.

Another data released by the CMAlert, an industry newsletter shared that in the month of August, CMBS issuance totaled 55.4 billion, which is 34.4 percent up from the same period in 2016. MBA’s Commercial/Multifamily Originations Index also reported that CMBS origination volume reached 153 in the second quarter. It raised from 117 percent from the first quarter.

Why foreign investors should consider CMBS

The Association of Foreign Investors in Real Estate came out with a survey report that stated that around 81% of their respondents desire to increase their portfolio of assets in the U.S. Not only they consider it as a stable investment environment, but also as the top market when it comes to capital appreciation. While the investors from Singapore, China and Norway have always topped the investor list in the US, the year also saw some new entrants from South Korea, Malaysia, and the Middle East, among others. Interestingly, foreign investors are increasingly looking to invest in debt markets. The new entrants find real estate debt as a balancing asset class. The US CMBS remains low-priced in comparison to other US indices. It also offers numerous competitive advantages and provides a tax-efficient means of participating in the market. Moreover, it also provides liquidity, confidentiality, market access and visibility. This is why foreign investors who are on the lookout of such exposures should consider CMBS.

Thus, the rising appetite for commercial mortgage-backed securities is allowing conduits to actively bid on new mortgages and make commercial real estate peaking. At Clik, we understand the need of discipline in underwriting CMBS loans and that is why we offer detailed underwriting by analyzing the property operating performance, tenant analysis, borrower analysis and loan analysis.


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