Published on 02/02/2022 on Creditvillage.news
At the end of November, I had the opportunity to participate in a conference organized by Zenith Service on real estate securitization.
We brought to the conference our testimony as a first mover in this particular category and it was an opportunity to deepen some issues and discuss with prepared and pragmatic colleagues.
As often happens, through discussion and listening, new points of view and new opportunities emerge. Our current view of this area of securitization was probably correct but incomplete; the testimony of a master servicer and other special servicers has enabled us to understand different situations, which we had not imagined and which we had not thought about.
We are convinced, for example, that some real estate operators have finally approached the tool and are starting to perfect the first operations. Most of the operators had noticed that the first to go were different players; paradoxically, the point of entry into the instrument was not real estate but the possibility of investing in this asset class by issuing bonds.
In essence, the investors who entered first did so attracted by the greater perceived comfort in the structure rather than by the intrinsic characteristics of the operations.
Obviously, none of these are / were divorced from the real estate world, but in fact they weren’t even before; this means that the new regulations have played a decisive role.
Reasoning on the ratio legis and having acknowledged that everyone (including us of course) has the right to exploit the opportunity, it seems clear to me that the will of the legislator is to move capital into the real estate market and to introduce a more effective investment mechanism in the latter regulated and compliant. It is clear that if real estate developers do not enter the game, the ratio legis is only half fulfilled.
What emerges with respect to the approach of “pure” real estate developers to the world of real estate securitization is paradoxically the opposite problem that occurred with the first movers.
While the latter, master and special servicers, had few problems in arranging operations but several structural adaptation problems due to the new composition of the underlying (poor knowledge of the subject for master servicers and need for adaptation of asset managers, business plans and reports for special servicers), now the exact opposite occurs: the new approaches are perfectly familiar with the asset class but have little (or no) familiarity with the dynamics of SPVs.
At this point, at least two scenarios could emerge in the coming months:
- mutual exchange of skills between players and organic strengthening of the servicer structures (substantially mandatory for masters, optional for specials)
- birth of intermediate professional figures (special servicer or advisor) who make up for the missing know-how of the parties involved.
There is no right or wrong choice, it depends on various factors such as the occasional nature of the operations and the propensity of the entrepreneur / servicer to outsource. What appears evident is the will of the regulator to include in the market an instrument that raises the level of compliance and the entry threshold for the execution of certain operations and the management of the related investment capital.
The writer is convinced that the tool, if applied correctly and in the long term, can revolutionize the approach of banks to real estate investment and the provision of guaranteed loans in a general sense.
The obsolescence of the real estate risk assessment system is obvious to all: it is based on guarantees and not on flows; taking out the mortgage is time-consuming and expensive; the returns are extremely low. Extending the instrument to a less qualified market is a challenge which, if successful, will lead to the provision of more informed, less risky and more profitable credit.
The third scenario involves the creation of Joint Ventures between the various servicers. Between finance and real estate, to generalize. Obviously, we can structure ourselves, but it is undeniable that a mixture of the different strengths can lead to a better result.
The enormous flexibility of the securitization tool and the ability to customize risk and remuneration levels represent the ideal scene for a joint venture. Through the preparation of a detailed business plan and the prediction of the various scenarios, all the possibilities can be regulated from the beginning and situations of possible misunderstanding and operational blocks can be reduced to a minimum.
The risk capital necessary for the redevelopment of real estate and ancillary costs (so-called capex) has a decidedly different weight and perception between real estate and non-real estate operators; obviously it is not the only point of intersection, even if in any case the contribution of this capital / work represents the ideal context of the union between the two types of actors.
We will monitor the developments of this market with the conviction that it represents a path that once started we will never go back.
Emanuele Grassi
