European CMBS Pricing: Bond, Mortgage, and Real Estate Characteristics

The recent global economic crisis is often associated with the development and pricing of mortgage-backed securities (MBS) and underlying products (i.e., subprime mortgages). In their research, Marcato and Tira use a rich database of MBS issues and present the first attempt to price commercial MBS (CMBS) in the European market. Their results are consistent with research carried out in the U.S. market. They find that multinational as well as bond-, mortgage-, and real estate-related characteristics show different degrees of significance in explaining European CMBS spreads at issuance. Multiple linear regression analysis, using a databank of CMBSs issued between 1997 and 2007, indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. Marcato and Tira also find that multinational factors are significant, with country of issuance, collateral location, and access to more-liquid markets all being important in explaining the cost of secured funding for real estate companies. As floater-coupon tranches tend to be riskier and exhibit higher spreads, they also estimate a model using this subset of data. The results hold and hence reinforce their findings. Finally, the authors estimate their model for both tranches A and B and find that real estate factors become relatively more important for the riskier investment products.