A proposed change to German investment law would provide new sources of capital to multifamily commercial properties in the form of real estate investment trusts (REITs). Current law prohibits German REITs from holding portfolios of German residential properties built before 2007, including commercial mortgage-backed securitizations (CMBS) backed by multifamily developments. Analysts at Moody’s Investors Service estimate multifamily residential properties accounted for nearly 40% of German CMBS issuance in 2005 and 2006. The 2005 and 2006 vintage multifamily CMBS portfolio represents more than 160,000 units worth €11bn (US$16.5bn). According to Moody’s, a “large amount” of that debt needs to be refinanced in 2012 and 2013, a difficult task given current and projected market conditions. But if the legislative proposal takes effect, German REITs would be a fresh source of capital, reducing the refinance risk for these CMBS transactions, the analysts said. While the Moody’s analysts expect the European commercial real estate market to recovery by 2012, they added its uncertain whether current regulations allow refinancing of the large pool of CMBS during that time. “We believe the market warmly welcomes any additional sources of financing or actions that make it easier to source capital for German residential property portfolios,” wrote Moody’s assistant vice president and analyst Oliver Schmitt, and senior vice president and analyst Christian Aufsatz. The proposed change would also provide an exit strategy for private equity and real estate companies that invested in German multi-family portfolios in the past few years, the analysts wrote. The firms could “float” the real estate companies as REITs to reduce debt. This would be a preferred option to a traditional initial public offering (IPO) because of the tax-exempt status afforded to REITs, thereby potentially attracting more investors at a higher price. “Overall, the German multi-family sector and corresponding CMBS would benefit from the proposed changes to the REIT legislation,” the analysts wrote. “They would improve access to fresh capital for the affected residential housing companies, especially in light of the refinancing risk in 2012 and 2013 posed by the large exposures.” Write to Austin Kilgore.
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