Moody's: Real estate corporate issuers buoyed by resilient European economies

Robust European economic performance will remain supportive of European commercial real estate (CRE) markets, but downside risks are increasingly stemming from emerging markets, China and lower commodity prices, Moody's Investors Service said in a report published today.

"The stable macro-economic outlook for Europe, with our forecast of overall GDP growth of 1.5% in 2016-17, continues to support European CRE markets as investment volume in the market is buoyed by strong property market fundamentals" says Magdalena Umsonst-Suminska, a Moody's Vice President. However, lower growth in emerging markets and China will dampen exports from Europe, weighing on growth across the region, and also on CRE markets.

"We identify larger risk buffers for real estate corporate issuers than for Commercial Mortgage-Backed Securities (CMBS) 2.0 loans, with the former demonstrating strong and increasing fixed charge coverage ratios over the last decade, recently additionally boosted by higher earnings and low interest rates" says Roberto Pozzi, a Moody's Vice President, Senior Credit Officer. Whilst the corporate real estate sector is sensitive to macro disruptions and cap rates at or near all-time lows, we note that increasing size, diversity and scope but also strong fixed charge coverage and overall lower leverage provide a buffer against changes in property valuations, in our opinion.

Meanwhile, CMBS lenders continue to move up the risk curve, heavily competing for loans backed by good assets. Moody's expects some marginal deterioration in CMBS loan underwriting standards in 2016, owing to higher competition in the lending market, while refinancing risk remains the main credit risk for these securitised loans.