A slower correction in mainland European property values has turned tens of billions of euros of mortgage-backed bonds into potential time-bombs with a greater risk of defaulting than their UK peers, Fitch Ratings said.
The agency has so far this year downgraded 47.2 billion euros (S$97.7 billion), or 69 per cent, of European commercial mortgage- backed securities (CMBS) notes that it tracks, and maintains either Rating Watch Negative or Negative Outlook on a further 52 billion euros of notes.
It said that refinancing risk for CMBS linked to French, Dutch or German real estate may be even greater than in Britain because so many transactions were completed at the peak of a property boom in 2006 and 2007.
UK real estate prices have rallied after falling almost 45 per cent in the two years to September, but Fitch senior director Euan Gatfield said that continental European markets may be lagging, with further declines likely to collide with a wave of impending maturities over the next five years.
‘There is hope that the worst is over for UK commercial real estate, something that cannot be said for most mainland European markets,’ Mr Gatfield said.
‘With a prolonged wave of maturities arriving in two years time, financing pressures are building in the sector,’ he said.
Negative rating action has been concentrated in European CMBS without UK exposure, despite the fact that few borrowers have yet to deal with a loan maturity in European CMBS.
Although less than 5 per cent of European CMBS loans have suffered a missed payment, Fitch said that the growing number of financial covenants in breach of their terms has foreshadowed the difficulties that even performing borrowers will face when repayment is due.
Fitch said that about five billion euros of CMBS are due to mature in 2010, followed by 61 billion euros between 2011 and 2014, with a third of securities falling due in 2013. Some 13.5 billion euros worth of German CMBS loans are set to mature in 2013, including 10 billion euros from just four multi-family housing mortgages, twice the UK’s peak of 6.6 billion euros projected for 2012.
Source: Business Times, 26 Nov 2009