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By Helen Avery
Posted on euromoney.com
road hoping to raise $91 billion – up from the 266 funds last year looking for $75 billion, says the firm.
Greg MacKinnon, director of real estate at the Pension Real Estate Association, says that while the market seems overpriced, cross-border investor interest may keep the returns and demand coming.
However, not all foreign banks are looking to shed CRE assets, some are even rebuilding their businesses. At the end of January, French bank Société Générale acquired a team of 11 CMBS bankers from RBS and is re-launching a US CMBS business. SocGen closed its CMBS business in 2008, at the height of the financial crisis, while RBS has been slowly exiting its fixed income business in the US, with CMBS being the last division to go.
SocGen said the development is part of a global initiative headed to "develop asset-backed product capabilities that will take advantage of a trend towards increased securitization to finance the economy at a time when many banks’ capacity to hold assets on their balance sheets is limited."
Competition in the sector is increasing. The CMBS market has come back from the lows of the financial crisis, and with refinancing of 10-year loans from 2005, 2006 and 2007 coming due, commercial real estate offers new opportunities.
"Over $1.1 trillion of commercial real estate loans in the US are coming up for refinancing, so a massive wave of origination is about to happen," says Larry Kravetz, head of CMBS origination at Barclays in New York.
This year, $120 billion of CMBS deals is expected, and upwards of $150 billion is predicted for both 2016 and in 2017.
"Deals are smaller but there are more of them. There is a tremendous amount of activity, and the market is functioning well," says Kravetz. "It’s an exciting area right now, and non-banks and banks are both looking to get into the market."
Acquiring teams as TPG and SocGen have done seems the best way to build up CMBS operations, but there aren’t many opportunities such as these in the market. Wayne Potters, who was head of RBS’s commercial real estate group and will now head CMBS at SocGen, says the competitive landscape is a very different one to that of 2008. "Back then there were 17 or so money-centre banks with 150 or so people on the CMBS desks," he says. "Together they accounted for some 80% of volume. Now there are fewer banks and more specialty finance companies. But overall the headcount is about 50% less in the entire market than it was back in 2008." Talent therefore is scarcer.
Solid Fundamentals
The renewed desire to enter the US commercial real estate lending market in particular is not only due to loan refinancing but also thanks to solid fundamentals. Activity is picking up again after a construction lull, and the outlook for the US economy looks set to support growth.
Potters says it is no surprise that banks and non-banks are looking to build up their commercial real estate capabilities and that the market has become less risky with greater upside.
"In 2007 the peak stressed LTV was 17%, according to Moody’s, but their triple-A subordination was 11% and sometimes in the single digits," he says. "Triple-A subordination today, however, is in the low 20s, so the amount of credit support has doubled. I would argue the Moody’s LTV is also more conservative today. We are looking at lower leveraged loans and greater credit support."