Recovery in Europe's sluggish market for commercial property bonds is lagging up to five years behind the United States, delaying a return to cheaper borrowing and putting the brakes on real estate prices.
Without radical reform, Europe's commercial mortgage-backed securities (CMBS) sector may never serve as a fruitful source of debt again, experts said, while in the US, demand for real estate bonds and the allure of distressed assets is sparking more lending from banks, private equity and hedge funds.
"The rules of the game have to change dramatically to give confidence to investors to embrace the European market again," said BNP Paribas real estate securitisation head Marco Rampin.
Commercial Real Estate Finance Council data shows about $2.4 billion of US CMBS were packaged and sold in first-half 2010, from $638.5 million a year ago, including the rebirth of multi-loan deals key to expanding credit to property buyers.
Europe, on the other hand, is still waiting for its first genuine post-crisis CMBS issue, even though average commercial property prices in key markets like Britain have gained about 15 percent in the past year.
The UK growth has slowed sharply since March, data from CB Richard Ellis shows, with the decline blamed on lack of credit.
Figures from Deutsche Bank show outstanding European CMBS total $195 billion, against $855 billion in the United States. Between now and end-2013, about $150 billion of US CMBS falls due for refinance, against $30 billion in Europe.
Although five-times smaller, Europe's CMBS refinancing task may prove a bigger challenge due to inherent structural quirks.
"The European CMBS market is much younger and didn't have chance to develop many of the "strengths" of the US product before the downturn," said Citigroup CMBS analyst Stav Gaon.
The 15-year-old US market was deeper, and had greater experience of managing troubled loans, Gaon said. Detailing a major flaw, experts said most European CMBS gave junior noteholders too much sway relative to their stake, which meant they could block asset liquidation if a bond defaulted.
This potential for conflict, combined with the lack of an empowered industry of bond trouble-shooters, known as special servicers, has done more to repel prospective European CMBS buyers and issuers than most other factors, the experts said.
Meantime, underwriters on a recent US issue gave AAA-rated investors majority control in special servicing to allay similar concerns, Deutsche Bank analyst Harris Trifon said in a note.
Until more logical rules on creditor relationships are set, credit flows to Europe's property market are likely to remain stunted, limiting potential growth in real estate values.
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