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European Multifamily CMBS: Still a Defensive Asset Class?

In this commentary, we assess the outlook for the multifamily sector in the European commercial mortgage-backed securities (CMBS) market against a background of the rising cost of debt.

Key highlights include:
-- New issuance CMBS multifamily volumes during the financial crises, both in the U.S. and European CMBS markets, proved this asset class to be a defensive type of investment.
-- In Europe, positive demographic factors and an undersupplied residential market, especially in the UK and Germany, have sustained stable performance. Also, subsegments such as built to rent (BTR), student accommodation, and social housing have emerged. DBRS Morningstar expects more CMBS transactions backed by German multifamily to come to the market, as well as new transactions for UK student housing and BTR, backed by strong investor demand.
-- DBRS Morningstar-rated UK transactions backed by social housing were the first in the European CMBS market to be labelled as social bonds carrying a second party opinion. This trend that will evolve further.

“Property yields will increase alongside rising reference rates, resulting in value decline. This, in addition to the rising cost of debt will make refinancing more challenging in the future. However, the risk of defaulting is mitigated by strong sponsorship and relatively low initial yield, along with new features such as soft maturity and cash sweep mechanisms which are triggered at initial maturity if the loan is expended. That said, if the rent increase is limited and reference rates keep rising, rental growth might not be enough to offset rising investment yields”, said Patrizia Catanese, Assistant Vice President of European CMBS at DBRS Morningstar.