Global credit turmoil has spilled over into the market
for bonds backed by US commercial mortgages, threatening
to push down property prices and scuttle deals.
Issuance of US commercial-mortgage-backed securities
fell to $6.3bn in October, down 84 per cent from a
record $38.5bn in March, according to Commercial
Mortgage Alert, a trade publication. The decline in CMBS
issuance is crucial because such securities have
provided an estimated 40 to 60 per cent of financing for
new commercial property purchases in recent years.
"Investors have become risk-averse. They are
hysterical about anything related to mortgages," said
Lisa Pendergast, a managing director at RBS Greenwich
Capital.
Moody’s index of commercial real estate prices is
expected to show that prices flattened or fell in
September, after rising nearly 14 per cent in the 12
months to August. RBS Greenwich Capital predicts that US
commercial property prices will fall 10-15 per cent next
year.
Market turbulence is also raising the cost of
commercial mortgage borrowing.
The difference in rates on AAA-rated CMBS and the
so-called risk-free rate has more than doubled since
June, reaching their highest level since October 1998.
Investors have fled the CMBS market, in part because
of worries that riskier lending practices in commercial
real estate would lead to higher defaults, industry
executives say.
In the last six to 12 months, banks have scrambled to
attract borrowers by agreeing to looser terms – making
loans that exceed the value of properties and accepting
more interest-only repayments. Loans rose to 118 per
cent of the value of commercial properties in the last
quarter, Moody’s says.
So far, more than $7bn in CMBS has been issued in
November, but volumes are set to fall to lower levels
because of the shortage of deals in the pipeline. Ms
Pendergast expects total issuance to fall to $100bn or
less next year, the lowest since 2004, from what
analysts expect to be a record $245bn this year.
The total value of outstanding securitised commercial
property loans was $804bn at the end of the first
quarter of 2007. That compares with $6,260bn of
outstanding securitised residential mortgages.
Industry insiders insist that underwriting standards
for commercial loans are better than those for subprime
residential mortgages.