Future of European CRE CLO market contemplated

Despite no new issuance since Starz Realty Capital’s debut in 2021 (SCI 9 December 2021), the underlying message from those closest to the European CRE CLO market is simple: it’s better than the headlines are making it seem. With just one public deal closed in Europe thus far, CRE CLOs still stand up as a strong funding tool for sponsors holding small-medium loans, according to panellists at SCI’s inaugural European CRE Finance Seminar held at the close of last year.

In fact, CRE CLOs have many advantages, from greater portfolio management flexibility to the opportunity for sponsors and banks to work closely – with banks being more involved than in most other corners of the capital markets. Additionally, CRE CLOs are considered particularly well-suited to funding transitional assets.

However, for sponsors, borrower disclosure is often a fine balancing act. Hence, there remains a need to educate some borrowers on the product.

For Europe, perhaps the primary challenge facing CRE CLO issuance is the lack of currency and regulatory uniformity, which has only been worsened by Brexit. Some hesitancy may also originate from concerns relating to asset quality, given that many CRE loans seen in 2022 were originated during the pandemic, and a strong track record will be necessary.

Despite recent challenges across the CRE market, the Starz Mortgage Securities 2021-1 deal has performed robustly through the credit cycle. So far, of the nine loans originally securitised in the transaction, just three remain outstanding – all of which are due to mature this year. Panellists reported that no losses or any significant issues are on the cards at the moment - with the worst-case scenario appearing to only be a short-term extension.

But recent European CMBS prints have not been encouraging from a pricing perspective for any potential CRE CLO issuers across the region – although whether these numbers represent a blip should become clearer as the year progresses.

Perhaps against all odds, hope remains for the CRE CLO market, as loan originators find themselves inundated with interest for short-term loans amid the seemingly endless interest rate scenario. However, as the panellists noted, this itself does not rule out the prospect for CRE CLOs to be backed by large loans in the future.

Aeon Investments is among those believed to remain close to the pipeline, given the closing of its first CRE CLO warehouse in October 2022 (SCI 21 October 2022).

Claudia Lewis