CMBS to rise as commercial property lending stalls
The European commercial mortgage-backed securities (CMBS) market is set to soar in the coming months as a slowdown in commercial property lending leads to mass refinancing.
Analysts at Morningstar DBRS have predicted that the European CMBS market is likely to experience refinancing pressure in the first half of 2024.
However, the prospect of lower interest rates could lead to an improvement in the commercial real estate sector by reducing financing costs and increasing values in the second half of the year.
“As European banks reduce their exposure to commercial real estate lending, widening the debt funding gap, alternative lenders are unlikely to fulfil such a gap despite their consistent growth in the last few years,” said Morningstar DBRS analysts.
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“As seen in 2023, we expect more borrowers with upcoming loan maturities in 2024 to look for loan extensions, waiting for a largely anticipated reduction of interest rates and a recovery of the commercial real estate market.”
According to CBRE, investment volumes in the commercial real estate sector were down by more than 50 per cent last year. At Morningstar DBRS, downgrades outnumbered upgrades for the first time since 2020.
Meanwhile, specialist property lending experts Octane Capital said that they expect lending for commercial construction to fall for the second consecutive year, due to the impact of interest rate rises.
Octane Capital has estimated that the average monthly total of outstanding lending will reach £33.26bn in 2023, marking a -7.1 per cent drop from the year before.
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“While the pandemic accelerated the trend for more businesses to embrace hybrid working, it must have come as a shock to the office sector, as it’s ultimately businesses paying competitive rents that justify these construction projects,” said Jonathan Samuels, chief executive of Octane Capital.
“Another factor hitting construction is the cost of financing, as it’s becoming harder for developers to make a good return on their investment given that interest rates are relatively high.
“One positive is that interest rates now look to be falling again, so it could become more affordable for developers to fund projects in 2024 and beyond, which should help cultivate some growth, albeit this will likely remain subdued versus historic highs.”
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