The growth of commercial real estate (CRE) collateralised loan obligations (CLO) in Europe still faces many challenges compared to its US counterparts, according to a report by Morningstar DBRS.
Multicurrency risks, the lack of a large and specialised investor base and country-specific CRE laws are contributing to the asset class being less popular than in the US, the authors of the report say.
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However, the increasing role of non-bank lenders in originating smaller, short-term, transitional real estate loans may provide a boost for the development of CRE CLOs as a sub-asset class in the European commercial mortgage-backed securities (CMBS) market, the report adds.
While there is no common definition of European CRE CLOs, they tend to be backed by more transitional assets and are characterised by a dynamic pool of loans actively managed by a collateral manager.
The collateral manager then modifies the collateral pool of performing loans and their loan terms, without requiring investors’ approval, subject to certain eligibility and acquisition criteria being met.
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The authors continue that the rationale for investing in these types of financial products is that it can provide lenders with funding and capital relief, while investors benefit from exposure to diversified CRE debt.
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