Driving Factors in Pricing European CMBS: Bond, Mortgage and Real Estate Characteristics

"The current credit crunch has revealed that the property fundamentals should account for the prices of at least lower ranked tranches. Therefore, we intend to identify the driving factors of the initial spread of commercial mortgage backed securities (CMBS) in European markets. Previous studies have identified different models to approach the problem of the pricing of a CMBS (i.e. panel data approach, linear regression models and kernel density models). However, the majority of works focus on the US market, revealing the need to extend this analysis to other regions such as the European one, which, by volume, has now almost reached the size of the US market. More specifically this research intends to study the significance of bond, mortgage and property-related variables in the pricing of European commercial mortgage backed securities (CMBS), along with macro-economic and financial factors used as control variables. Particularly we define some variables to describe the underlying property portfolio and the behavior of the real estate market to test their significance in explaining CMBS spreads. Multiple linear regression analysis using a databank of A Tranches issued between 1997 and 2007 indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. As floater coupon tranches tend to be riskier and exhibit higher spreads, we also estimate a model using this sub-set of data only and results hold reinforcing our findings.""