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Tuesday, 16th September 2025 |
| Property securitisation – the next big play |
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| With the market more than doubling in 2005, Henry Cleary outlines the function of commercial mortage-backed securities (CMBS), showing that CMBS are a flexible, inexpensive alternative form of financing, which are being used more and more by Irish investors to fund property transactions. |
There has been a lot of news coverage about property securitisation, usually through a vehicle known as commercial mortgage-backed securities (CMBS), over the last few years. The publicity has tended to focus on the latest large securitisations of well-known trophy properties such as the Canary Wharf in London, though the market now also caters for smaller loans sizes of about €10 million, an indication of how the market has matured in recent years.
Property securitisation/CMBS is a means of financing property assets via the debt capital markets. Banks such as Barclays are able to offer individual borrowers access to debt capital pricing by pooling a number of loans together and selling the pooled debt via a property bond in the bond market. Typical quantum of debt in the pool will range from €400m upwards- made up of a single loan or a combination of smaller loans.
The move towards financing via CMBS is evident from the increase in deals activity and the number of European CMBS issuance. The market more than doubled in 2005 to €40.7 billion compared with €19.2 billion in 2004 and €11.4 billion in 2003. We expect issuance of €60 billion for 2006, which will represent approximately 50 per cent growth year-on-year. Approximately 65 per cent of all past issuance has come from the UK, with the remainder coming from other European countries.
The first Irish property assets financed using CMBS was a €200m investment portfolio owned by a listed Irish property company, financed in 1998. Since then we have seen the number of Irish property assets financed using CMBS increase and we expect this to increase significantly in the coming years. The increased Irish deal activity is due to the following:
1. Irish property investors becoming more and more sophisticated and thus looking for cheaper and alternative ways of financing their existing euro, dollar or sterling denominated property assets.
2. There are now more large property deals being executed by Irish investors and it is often easier to fund these deals via the debt capital markets as opposed to the traditional bank markets.
3. The maturing CMBS market will now accept smaller loan sizes. In the early years only large deals were financed via CMBS though deals as low as ?10 million are currently been placed in the CMBS pools.
4. Irish investors are seeking property opportunities in the UK and mainland Europe where the majority of CMBS deals have been previously executed.
CMBS- what are they?
CMBS are bonds sold through the capital markets, whose payments are backed by commercial mortgage loans. The bonds are created on the back of a pool of property loans with the investor benefiting from the pooling of the loans. These bonds are typically rated by one or more credit rating agencies as a means of assisting bond investors with their risk analysis. CMBS provides an alternative to the traditional mortgage financing provided by a single bank holding the loan on its balance sheet or financing provided by a syndicate of several banks.
A single CMBS transaction may contain a large number of loans or, if the loan is large enough, just a single loan. For diversification purposes, we believe that CMBS investors prefer pools with larger numbers of loans. Typical pool size is €400m or higher.
What are the reasons for the strong growth in European CMBS issuance over the past few years?
In our view, there are two main inter-related reasons, one driven by the bond investor and the second by the bond issuer. Firstly, the number of investors interested in buying CMBS bonds has increased. Apart from the traditional bank investor, we are now seeing an increased number of fund managers and ABS investors acquiring the bonds. Furthermore CMBS bond spreads are more attractive to bond investors compared with other bond categories and this too has increased demand.
From the issuer / borrower perspective the growth in CMBS issuance is also aided by the lower spreads available - which have made CMBS more attractive than other financing options to borrowers.
What asset classes are suitable for CMBS?
We in Barclays Bank have financed most property classes using CMBS loans - varying from multi and single tenanted office developments to shopping centres, retail parks, industrial warehouses and business parks. However hotel and leisure type assets are not hugely appealing to the CMBS market.
Conclusion
The first Irish property assets financed using CMBS were in the late 1990s. The market has matured quiet significantly since then and banks such as Barclays are now able to offer CMBS loans on property assets of E10 million and upwards. The type of borrowers using CMBS financing has expanded from the large-listed property companies, such as British Land and Land Securities to now include investment managers, wealth managers and private client syndicates. Commercial property owners should consider CMBS because it offers an alternative, attractively priced and flexible financing source. As CMBS is a debt capital market product, the pricing (cost of funds) is from the debt capital markets, which should offer cheaper finance than the traditional bank markets. |
Henry Cleary is head of structured finance at Barclays Bank Ireland PLC
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