RPT-Fitch: Secondary German property bid positive; refi risks remain

Wed May 15, 2013 6:38am EDT

May 15 (Reuters) - (The following statement was released by the rating agency)

Signs of renewed investor interest in secondary German commercial real estate (CRE) markets suggest some respite from the refinancing challenges facing the sector, Fitch Ratings says. However, significant concerns remain because of the limited time left in which to resolve problem loans. Property in secondary locations, particularly in office and retail markets, comprises much of the collateral underpinning German loans packaged in European CMBS.

Rising risk appetites are encouraging investors to take exposure to some properties in secondary locations in Germany again, as indicated by Jones Lang LaSalle's (JLL) recent German investment market overview. JLL reported a Q113 increase in acquisitions of CRE in Germany, with overall transaction volumes rising 35% from a year earlier to EUR7.1bn. Average yields for prime properties in secondary locations across the "Big Seven" German cities fell to 5.54%, suggesting a "slight increase in the willingness to take risks."

For the last five years properties in secondary locations have been off-limits for many German CRE investors, which include foreign investors, real estate funds, and custodians of family wealth. They had focused on the most robust "core" locations such as the central business districts of the "Big Seven". The domestic banks with access to deep Pfandbrief funding markets are underwriting this renewed interest in German non-core CRE.

With about EUR7bn of German CMBS loans falling due in the next 12 months, an increase in investor demand for non-core properties is positive for the prospects for refinancing loans and disposing of CRE collateral. With a similar volume of German loans already overdue, CMBS bondholders will hope that improving sentiment will also allow servicers to expedite loan workouts, particularly given the potential crunch in bond maturities from 2016.

According to JLL, the yield pickup for for prime properties in secondary locations across Germany's "Big Seven" above those on prime sites has fallen below 80 basis points, suggesting a reversal in the tiering that took off in the crisis. However, JLL points out that while investors are more comfortable taking exposure to secondary locations, they are not yet willing to compromise on building or tenant quality.

A preference for lease and building quality over location signals growing confidence in the medium-term prospects for German CRE. But it also shows that despite Germany's relative insulation from the eurozone crisis, investors are still demanding income visibility as protection against short-term market volatility. With time pressure building as bond maturities draw closer and leases roll off, this stance will continue to drag on ratings in the sector.

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