July 2, 2012 / 2:48 PM / 5 years ago

TEXT-S&P: German multifamily housing repayments may have peaked

OVERVIEW
     -- German multifamily housing remains one of the strongest-performing 
sectors for European CMBS loan repayments, but only three loans have repaid of 
the seven that have already matured this year.
     -- While the average loan size in the sector is EUR123 million, each of 
this year's repaid loans totaled EUR16 million or less.
     -- Next year, 70% of the sector's maturing balance will have to refinance 
in a restricted market, with the largest three loans composing 73% of that 
year's maturing balance.
     -- Our study of loan-to-value ratios in the sector suggests that 63% of 
the maturing balance could fail to repay in 2012 and 2013.
     -- Income stability--due to portfolios' granular nature--may support the 
sector in the coming months, allowing special servicers time to define and 
execute appropriate workout strategies.
  
LONDON (Standard & Poor's) July 2, 2012--Although German multifamily housing 
(MFH) remains one of the strongest-performing sectors when looking at loan 
repayment rates, these may have peaked, according to Standard & Poor's Ratings 
Services' latest European commercial mortgage-backed securities (CMBS) monthly 
bulletin.

Our study this month suggests that loan sizes, maturity concentration, and 
loan-to-value (LTV) ratios could challenge the sector's ability to maintain 
the repayment rates previously observed--particularly in a constrained market.

While loans in delinquency and special servicing have been minimal compared 
with other sectors--mostly due to the stable and granular nature of the 
portfolios backing the loans--maturity payments have begun to deteriorate this 
year. Until the end of 2011, only about 3% of all maturing German MFH loans 
had defaulted (not including extended loans from 2011), compared with about 
12% of all maturing loans in European CMBS. This year, only three have repaid 
of the seven that have already matured.

The three repaid loans were for EUR16 million or less, while those that extended
averaged EUR111 million. We expect repayment rates to continue their decline 
into 2013, when 70% of loans in the sector are set to mature, with the largest 
three accounting for 73% of the year's maturing balance (although we 
understand that borrowers are actively exploring restructuring and refinancing 
solutions).

As with the wider CMBS pool, LTV ratios have proven key indicators of 
refinancing prospects in the sector: Of the three repaid loans this year, two 
had reported LTV ratios of 49% or below, while the third had an LTV ratio of 
about 70%. When considering our data for Q1 2012, which suggest that borrowers 
may struggle if their LTV ratios are greater than 60%, then 63% of the 
sector's maturing balance could struggle to repay in 2012 and 2013.

These factors have also affected our views on the creditworthiness of notes in 
German CMBS transactions backed by MFH loans. For instance, we recently 
lowered our ratings in German Residential Asset Note Distributor PLC, due to 
our view on the refinance risk in the transaction (see "Ratings Lowered On 
CMBS Deal German Residential Asset Note Distributor Classes A And B On 
Refinance Risk; Rest Affirmed," published on March 7, 2012).

Nonetheless, we've seen little evidence of distressed sales of the loans that 
we rate, but rather more extensions. We consider that income stability from 
the portfolios' stable and granular nature may support this sector in the 
coming months by allowing special servicers time to define and execute 
appropriate workout strategies.

RELATED CRITERIA AND RESEARCH

     -- European CMBS Monthly Bulletin (June 2012): Can German Multifamily 
Housing Rise To The Refinance Challenge?, July 2, 2012
     -- Ratings Lowered On CMBS Deal German Residential Asset Note Distributor 
Classes A And B On Refinance Risk; Rest Affirmed, March 7, 2012
  

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