Real estate CDOs: Equity tranches could be next for CRE
The US commercial real estate CDO market is the one to watch in 2006 for volumes and new opportunities.
Commercial real estate CDOs are set to be one of the fastest-evolving asset classes in 2006, according to CDO strategists at Citigroup. In particular, CRE CDO equity could be released in select transactions by CDO managers to institutional accounts.
CRE CDOs have been around since 1999 but used to be static pools of CMBS and Reit debt. In the past two years, at the same time that CRE CDO structures have become actively managed, a new breed of CRE CDOs have emerged as underwriters. These include specialist buyers of B notes and mezzanine loans that have securitized unrated commercial real estate assets that do not go into CMBS. These include B loans, mezzanine loans, subordinate classes of CMBS and increasingly whole loans, Reit trust preferred securities and credit tenant lease loans. “Commercial real estate CDOs have only been seen as a class separate from the ABS CDO market for a few years,” says Jeffrey Prince, US CDO strategist at Citigroup.
Testing the market
To date, though, these have purely been financing vehicles for originators. Now Prince thinks managers are looking at arbitrage opportunities. “Most of the CRE CDOs that have been done in the last few years have been purely financing trades by originators, such as mortgage Reits and subordinated real estate lenders, who have hung on to the equity,” he says.