"In a downturn, such inconsistency may reflect motivations peculiar to banks. On the one hand there is strong pressure for banks to rebuild cash reserves and one way to achieve this is by reining in new lending. On the other, banks are keen to avoid punching more holes in their balance sheets, and so they are holding off from crystallising loan losses that would accompany liquidation in the current climate," says Euan Gatfield, Senior Director in Fitch's EMEA CMBS team. "There is also a risk forced sales would accelerate and even exacerbate price declines, triggering a downward spiral of further forced sales. Whatever reasons are causing banks to behave in this manner, telling some customers not to buy and others not to sell is contradictory."
"Concerns about the risk of declines in rental income are legitimate and shouldn't be downplayed. In the near term, this will be reflected in negative rating migration in the sector," says Andrew Currie, Managing Director in Fitch's EMEA CMBS team. "However, the unusually high disparity between swap rates and property yields suggests future rents are already being heavily discounted by valuers. It is something of a paradox that rental yields reportedly in double digits are unable to stimulate purchases of commercial real estate on anything like the scale seen when they were much tighter."
Until conditions in the banking system ease, Fitch expects equivalent rental yields to converge on equity rates of return achievable elsewhere. While this continues to translate into widening yields and falling values, negative rating migration for UK CMBS will persist, especially for bonds legally due to mature in the short- to medium-term.
