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Wednesday, June 15, 2011

Water water everywhere and not a drop to drink

By: Norm Arychuk, Debt Capital Markets (Toronto)


Everyone talks of the substantial liquidity for real estate debt in the Canadian market today, but is it true? Two of the four largest life insurance companies are currently not lending, while the other two are only lending on “super AAA” product, and then only on a very conservative basis. Canadian banks all have their own idiosyncrasies for real estate lending. Second and third tier lenders are segmented in their underwriting approach. Yet it appears to be all getting done. Will it last?
The Canadian real estate market has moved so fast and far over the past year (as compared to many other markets including the US) that some of the biggest names are running into lending ceilings from their most relied upon institutions. Some new players have appeared on the national landscape, with the likelihood of more new name lenders on the horizon; which will go a long way in helping.
The waves that are forming offshore will bring a substantial flow of mortgage maturities over and above those delivered by conventional lending sources. These waves aka CMBS maturities, which will start to appear in meaningful volumes in 2015 and 2016, will ramp up to the highest level in 2017. This barrage of maturing debt is likely to add some stress to the Canadian lending markets. A higher interest rate environment and the lack of an efficient CMBS market may contribute additional challenges for these property owners who will need refinancing. Balancing these challenges is the velocity of real estate values, moving positively to reduce the leverage that will be necessary for mortgage refinancing.
The Canadian CMBS market has poked its head out, albeit for only a brief period. With the US nurturing the return of their CMBS market slowly, a spillover into the Canadian market will hopefully occur in the not too distant future.

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