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The commercial mortgage-backed securities and multi-family bond market in Europe, the Middle East and Africa continued growing sharply in the first half of this year, with issuance of EUR35bn representing an increase of 94 per cent from the same period in 2006, according to Moody's Investors Service.

However, this growth rate needs to be seen in context, as issuance last year was heavily concentrated in the second half, Moody's says in its 2007 First Half Review and Second Half Outlook report on this market.

A total of 38 CMBS and multi-family transactions closed in Europe, the Middle East and Africa in the first half of this year, with an average deal size of EUR921m. This represents a notable increase in deal size, as large deals now comprise a greater proportion of the total.

In the first six months of 2007, 16 of the 38 deals were bigger than EUR1bn, compared with 22 of 89 in the whole of last year. The average number of loans per transaction has also increased.

Germany overtook the UK as the leading market this year and has already reached 58 per cent of the volumes it recorded in 2006. 'The proportion of pan-European deals has risen to 16, or 45 per cent of total issuance, as property investors and conduit lenders continue to expand outside the UK,' says Moody's associate analyst Isis Pinet, the author of the report. 'As expected at the beginning of the year, the first loans secured on properties from central European countries and one transaction from Dubai were seen.'

The relative share of loans secured by operating assets such as hotels, pubs and nursing homes continued to rise as conduit lenders have been seeking incremental spread. Moody's notes that this type of collateral requires special consideration as it is exposed to the performance of the operator and higher cash flow volatility, which results in higher volatility in value.

The rating agency's forecast of total 2007 issuance of EUR80-85bn remains unchanged. However, if market sentiment does not improve in the third quarter it may be difficult for Moody's forecast to materialise.

'The deal pipeline for the next few months remains strong and significant product is still on originators' balance sheets,' says team managing director Ifigenia Palimeri. 'However, the recent spread-widening, interest rate increases and the more cautious approach that investors are currently exhibiting will likely lead to a correction in commercial mortgage-backed securities underwriting standards and pricing in the region.'

Although the market in Europe, the Middle East and Africa has continued to perform well to date, Moody's anticipates some pressure on the performance of the transactions, especially if real estate yields start to widen.


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