As the commercial mortgage-backed securities market has grown in the past year some observers have raised concerns that risks are not being adequately priced and that the broader uptake of CMBS – including in collateralized debt obligation tranches – could prove hazardous. Most bankers dismiss such suggestions as nonsense.
"We have not yet been through a full cycle so it's impossible to know exactly how CMBS will perform," says Arvind Bajaj, head of the European real estate finance and securitization group at Credit Suisse First Boston in London. "But CMBS is about segregating and allocating risk: investors who want less risk are able to purchase more senior securities."
However, investors that understand property and want yield can find it in subordinate tranches: where yields can be as high as 400 to 600 basis points. "These investors understand real estate and they want the additional yield," says Bajaj. "Therefore, risk is allocated to those that want it, and are best placed to understand it."
Similarly, although there are some concerns about CMBS going into CDOs – where they are in demand because of the yield pick-up they offer – because of the absence of specialist commercial real estate knowledge among CDO investors, bankers say this is not a problem.