Real estate CDOs: One size fits all?
Taking the successful US CRE CDO model and simply applying it to the European CMBS market is unlikely to work.
Despite a fair degree of scepticism in many corners of the market, insiders are confidently predicting that one (maybe even two) commercial real estate CDOs will close in Europe by the end of this year. These structures pool a wide range of real estate assets such as CMBS bonds, whole loans, B notes and mezzanine loans and have been popular in the US since the late 1990s. The relative immaturity of the CMBS market in Europe (particularly at the junior part of the capital structure) has always been considered a barrier to their use there. However, enthusiastic pioneers are now talking up the prospect of the product jumping the Atlantic.
The first CDO backed by commercial real estate assets appeared in 1999, and transactions backed by actively managed pools of assets appeared in 2004. The US market grew by 50% the following year to reach $14 billion at the end of 2005.
In Europe, Fortress Group’s Eurocastle vehicle is the closest thing the market yet has to a commercial real estate CDO. This is a Guernsey-based investment vehicle that was set up to invest in the equity pieces of primarily German CMBS transactions. It was an early precursor of the listed residual income funds that have sprung up in the market over the past year.