European properties grouped into commercial mortgage-backed securities may have to be unloaded in “fire sales” to ensure holders recoup part of their investment before the bonds mature, Moody’s Investors Service said.
Servicers resolving troubled loans will focus on repayment before the maturity of the CMBS notes, analysts Andrea Daniels and Oliver Moldenhauer wrote in a report. About 65 percent of European CMBS loans maturing in the first nine months of last year weren’t repaid on time and lending hasn’t improved this year, according to the New York-based ratings company.
“Fire sales could be necessary to ensure that recovery proceeds reach the noteholders before the maturity of the notes,” the Moody’s analysts wrote. “The prevailing work-out strategy pursued by relevant parties will continue to be to avoid a fire sale of the properties, provided that cash flows are sufficient to service outstanding debt.”
Subdued lending and a lack of demand for non-prime properties will make it more difficult for CMBS servicers to resolve troubled loans without selling assets, the analysts said. The value of income-producing office buildings in Europe rose 0.1 percent last year, according to broker Jones Lang LaSalle Inc. Values fell 0.6 percent in the fourth quarter, the Chicago-based company said.
CMBS pool cash flows from loans used to buy office buildings, shopping malls, multifamily housing and warehouse properties and package the payments into notes sold to investors. From April 2010 through December 2012, 68 CMBS loans were worked out by servicers and a quarter of the initial loan balance wasn’t recovered, according to the report.
The number of European CMBS repaying loans will remain at low levels through 2014, as weak economic growth delays a real estate market recovery, according to the report.