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MFAA Prosper : Mortgage and Finance Brief 08
Like a phoenix, there are signs the commercial mortgage-backed securities market (CMBS) will rise cautiously from its ashes this year, with the market expecting deals from Charter Hall, Centro and Colonial First State. Ray Slack, Director at BCP Group, says the rebirth of the CMBS market is good news for mortgage brokers because it will diversify fu nding sou rces for commercial real estate transactions. "It's a necessity because we need competition in the fu nding market. It will also help deliver fu nding for more specialised assets and meet the significant funding shortfall for property development clients," he says. The CMBS market was one of the hardest hit by the financial crisis, which w reaked serious havoc with commercial property asset valuations, a dynamic that brought the CMBS market to its knees. There hasn't been a public Australian CMBS deal done since March 2010, when Colonial First State closed a $683 million transaction. In 2009 there was only a $265 million deal done by Macquarie Country wide Finance and no deals at all in 2008. It's a far cry from the heady days of 2006 when the Aussie CMBS market was a sizeable $5 billion. Satish Chand, Director of Securitisation at NAB, says one of the reasons why the CMBS market has been so slow to get up off the canvas has been the relative attractiveness of other funding sou rces. In the wake of the crisis, he says, real estate investment tr usts built up liquidity by streamlining their banking relationships and raising equity because the market was looking for lower gearing levels. The flexibility of a bilateral banking relationship, which allows the bor rower to renegotiate with the banks on a one-to-one basis, has also reduced the attractiveness of the CMBS market, which doesn't offer borrowers the same degree of flexibility during the refinancing process. Jonathan Street, Executive Director of Think Tank Commercial Lending, says a key reason the CMBS market hasn't sparked to life is the ratings agencies' approach to CMBS assets. Street says: "Ratings agencies are going through a highly conser vative reappraisal stage. There's uncertainty over how they will rate asset pools and there's also a risk there could be disparity in ratings, which creates difficulties from where mezzanine or equity investors sit in new transactions coming to market." Indeed, changes to the way the ratings agencies view CMBS will have an ongoing influence on the shape of the market. Ethan Penner, New York-based President -- Capital Partners, CB Richard Ellis Investors, believes CMBS will not boom again like it did in the mid-2000s u nless the ratings agencies repeat their past mistakes or a massive buyer base for below-investment grade bonds emerges. "I believe neither is ver y likely to occu r and expect CMBS to normalise at levels similar to that before the boom years, or approximately 20 to 25% of peak year volumes." Street says another reason the CMBS market has yet to restart is investor appetite for deals. "Investors are still digesting exposures following mark-to-market w rite-dow ns of their CMBS investments. There has also been reticence to get back into the market because many have portfolio overhangs -- many are still full to the gills with relatively illiquid CMBS exposures, while others have reduced their investment allocations to the asset class." But Rob Verlander, the Commonwealth Bank's Head of Corporate Finance, Securitisation, says the investor market is slowly war ming to CMBS deals. "Last year's Colonial First State deal was oversubscribed, although having a cor nerstone investor was an important part of the deal's success. "All the ingredients needed for the market to restart are there -- pricing, investor appetite and the vacuum created by for ward refinancing. There's every reason to believe deals will be done this year, albeit at a slower pace than in the past. As long as economic activity remains high and there's a steady pipeline of new commercial properties, CMBS will re-emerge as a serious alternative funding source." From the ashes The commercial mortgage-backed securities market is almost back on track. Mortgage & Finance Brief looks at how key players expect this market to play out. Words Alexandra Cain “Ratings agencies are going through a highly conservative reappraisal stage. There's uncertainty over how they will rate asset pools.” 22 | Mortgage & Finance brief
Mortgage and Finance Brief 07
Mortgage and Finance Brief 09