European Real Estate Opportunities
Historically, the United Kingdom has accounted for more than half of new issue European CMBS. Other countries contributing to the European market include France, Italy, Sweden, Poland and Germany. There have also been a number of pan-European deals combining collateral from several countries. The management team expects this trend to continue and increase the supply of potential investment opportunities.
The pattern of issuance growth in European CMBS between 1999 and 2003 parallels the United States growth from 1990 to 1994. The European CMBS market is expected to grow steadily. The Manager believes this growth is spurred by several dynamics, including:
Continued consolidation of European financial institutions
European real estate lending has historically been dominated by floating
rate loans. As a result, European CMBS generally included floating rate
interest coupons. European CMBS are rated more conservatively than either
European corporate bonds or United States CMBS. Current European AAA/Aaa
subordination levels are similar to United States CMBS credit support levels
for the period from 1996 to 1998. Higher subordination benchmarks reflect
rating agencies’ conservative views of “new” asset classes
and a lack of detailed real estate performance history for European commercial
mortgages held in securitized form.
Asian Real Estate Opportunities
Historically, Japan has dominated the Asian CMBS market and Japanese CMBS has experienced continual growth. In 2004, approximately $6.9 billion of Japanese CMBS were issued. In 2005, Japanese new issuance reached over $7.4 billion, nearly the size of the United States market in 1991. Japanese CMBS, much like the United States CMBS market 15 years ago, is evolving out of distressed commercial real estate conditions. During the late 1980s and early 1990s in the United States, commercial real estate prices fell by approximately 32%, and mortgage delinquency rates set new records.
In the 1990s, Japan saw real estate values decline substantially after the dramatic real estate value appreciation of the 1980s. Similarly to the United States in the early 1990s, the stressed Japanese real estate environment has caused some of the dominant traditional lenders to exit the market, allowing CMBS to become a viable alternative capital source. The distressed asset phase of the United States development cycle lasted approximately five years while in Japan the phase has recently come to an end. At the middle or end of this phase, we expect growth in conduit deals and a decrease in CMBS backed by distressed assets.
Non-Japan Asia will continue to expand and develop. Given the growth throughout the region, these CMBS markets will also continue to expand and that the Fund will participate in such growth.
