Synthetic securitizations of commercial real estate loans are soaring this year following a five year slump since the onset of the coronavirus crisis. The normalisation of interest rates is one of the main drivers along with the broader post COVID recovery. However, some of the trades in the market are backed by blind pools where there’s a question about the extent to which refinancing risk can be assessed effectively in such portfolios.
SMBC, Frost bank, Merchants bank of Indiana, Aareal bank, Lloyds Bank, Societe Generale and Santander are some of the banks bringing CRE SRTs to market this year. One of the key drivers in the recovery is the normalisation of interest rates since as interest rates come down and valuations adjust upwards banks become more accommodative on financing.
Robert Bradbury, head of structured credit execution at Alvarez and Marsal notes: ‘’ pricing and competitive dynamics have improved as well as valuations but it’s refinancing risk that matters the most to SRT investors.’’
According to Scope ratings, all-in funding costs for investment-grade issuers have fallen from above 5% over a year ago to around 3%-4% at end-January 2025-for a 5-year bond-as central banks across Europe cut policy rates.
However, the rating agency cautions that the sector still has €120bn of capital market debt to roll over between 2025 and 2027, an increase of more than 40% compared with the three years between 2022 and 2024.
Figure 1-European real estate companies bond repayments
Source: Scope ratings
Post Covid recovery is another driver since as the return to cities and offices continues, demand for office space, industrial and data as well as retail goes up. However, for offices, much depends on the location, the length of the tenancy agreement, vacancy rates, whether the real estate is prime or urban and the CRE sector.
One investor comments: ‘’valuations and rates have normalised so yields should be stabilising along with LTVs. Refinancing risk is also less of a consideration than it used to be but it depends on the jurisdiction and CRE asset class. Vacancy rates for offices in Europe for example are still high and buildings have to comply with new ecological rules. Yet in the USA people have moved on and the market will adjust faster due to deep capital markets.’’
He continues: ‘’ One key question is refinancing risk for German office CRE. In the next two years interest rates won’t go down further due to inflation but German office CRE was priced when interest rates were at zero.’’
The analysis of risk and performance in commercial real estate would be incomplete without the key distinction between non-recourse financing and corporate real estate since refinancing risk would be approached differently for each of these categories.
The first refers to special purpose vehicles, debt funds and CMBS. The second refers to real estate corporates such as real estate developers and real estate investment trusts.
According to Scope ratings, 58% of non-recourse loans securitised in Europe since 2017 have shown stable or improved loan-to-value and debt yield metrics since the beginning of 2025. However, the picture varies significantly by sector and jurisdiction.
Florent Albert, executive director at Scope ratings explains: ‘’For example, there has been a rebound in acquisition activity—including large portfolio deals—in the UK, while liquidity remains constrained in Germany. At the same time, liability management exercises and refinancing solutions remain challenging without equity injections for certain non-recourse portfolios especially in the office sector.’’
He continues: ‘’Corporate real estate, by contrast, tends to involve a mix of financing structures and maturities—typically featuring more diversified portfolios, lower loan-to-value ratios, and higher debt service coverage. As a result, refinancing risk is approached differently than in non-recourse financing.’’
Commercial real estate trades can be executed as disclosed and as blind portfolios. Indeed, some of the transactions that are currently in the market do reference blind pools. However, not all investors are comfortable with them.
According to another buyer, ‘’if there’s a recourse behind the asset to the parent holding company that can backstop the exposure then that’s something we could look at, but it’s difficult to see how a blind pool can otherwise work from our perspective. The identity of the parent company wouldn’t be disclosed as part of the blind pool but investors would have access to the rating.’’
Bradbury responds: ‘In the case of SPV-based real estate projects there is a real difference between lending to the SPV instead of the sponsor. On that basis, even if the project is a blind pool then investors greatly value knowing the types of sponsor and concentrations that are behind it.’’
He continues: ‘’In the case of non-granular CRE pools, as many CRE SRTs are, it is much harder for investors to opt for a ‘fully blind pool. However if you have a high quality pool, a good level of granularity and clear, transparent data then there’s often no issue.’’
Blind pools can work with limited replenishment, low LTVs, conservative debt yield levels, access to borrower ratings and equity buffers. Moreover, it’s unclear whether one can find this parent company backstop in most transactions.
Yet there is a question about the extent to which refinancing risk can be assessed in a blind pool.
Bradbury states: “Refinancing risk can be assessed to a certain extent in a blind pool. Assuming a certain level of granularity you can get access to historical information, renewal rates, loss and recovery curves, CRE sector exposure, tenant information and syndicated versus bilateral positions.’’
He concludes: ‘While many asset managers can assess every individual credit, they don’t categorically follow this approach and they will increasingly have to be open to blind pools as the space continues to develop.’’
