Home • PRRES Inc. Journal • Read the Journal

Assessing Property Risk in Australian Commercial Mortgage-Backed Securities

Author/s: Bwembya Chikolwa

Date Published: 1/01/2008

Published in: Volume 14 - 2008 Issue 1 (pages 3 - 26)

Abstract

This paper investigates how property risk in Australian Commercial Mortgage-Backed Securities (CMBS) issued between 2000 and 2005 can be assessed and reported in a more systematic and consistent approach to be easily understood by institutional investors. Our framework shows that assessing and reporting property risk in Australian CMBSs, which are primarily backed by direct property assets, under the headings of investment quality risk, covenant strength risk, and depreciation and obsolescence risk can easily be done. Rating agencies can adopt a more systematic and consistent approach towards reporting of assessed property risk in CMBS. Issuers and institutional investors can examine the perceived consistency and appropriateness of the rating assigned to a CMBS issue by providing inferences concerning property risk assessment.

Download Full Article

Download the Full Article PDF

14445921.2008.11104245.pdf 14445921.2008.11104245.pdf (306kB)

Keywords

Commercial Mortgage-Backed Securities - Debt Service Coverage Ratio - Diversification - Loan-to-Value Ratio - Property Risk

References

  • Adair, A. & Hutchinson, N. 2005, ‘The Reporting of Risk in Real Estate Appraisal Property Risk Scoring’, Journal of Property Investment & Finance, vol. 23, no. 3, pp. 254-268.
  • Chikolwa, B. 2007, ‘Development of Australian Commercial Mortgage-Backed Securities’, Pacific Rim Property Research, (In Press).
  • Clayton UTZ 2003, A Guide to the Law of Securitisation in Australia: Third Edition, Clayton UZ, Sydney.
  • Colonial First Estate Global Asset Management 2006, Australian Property Markets, Colonial First Estate, Sydney.
  • Fabozzi, F. J. & Jacob, D. P. 1997, The Handbook of Commercial Mortgage-backed Securities, Frank Fabozzi Associates, New Hope.
  • Fitch Ratings 1999, Australian Commercial Mortgage Default Model, Fitch Ratings, Sydney.
  • Fitch Ratings 2005a, Multiplex CMBS Issuer Ltd. Series 2005-1, Fitch Ratings, Sydney.
  • Fitch Ratings 2005b, Multiplex CMBS Issuer Ltd. Series 2005-2, Fitch Ratings, Sydney.
  • French, N. & Gabrielli, L. 2004, ‘The Uncertainty of Valuation’, Journal of Property Investment & Finance, vol. 22, no. 6, pp. 484-500.
  • French, N. & Gabrielli, L. 2005, ‘Discounted Cash Flow: Accounting for Uncertainty’, Journal of Property Investment & Finance, vol. 23, no. 1, pp. 76-89.
  • Hedander, J. 2005, ‘An Empirical Study of Listed Property Trusts in Australia’, Pacific Rim Property Research, vol. 11, no. 1, pp. 84-111.
  • Henderson, J. & ING Barings 1997, Asset Securitization: Current Techniques and Emerging Market Applications, Euromoney Books, London.
  • Hughes, F. & Arissen, J. 2005, Global Real Estate Securities - Where Do They Fit in the Broader Market?, Euorpean Public Real Estate Association. Retrieved November 9, 2006, from http://www.epra.com/media/Size of the Total Real Estate Markets.pdf
  • Hutchinson, N. E., Adair, A. S. & Leheny, I. 2005, ‘Communicating Investment Risk to Clients: Property Risk Scoring’, Journal of Property Research, vol. 22, no. 2-3, pp. 137 161.
  • IPF 2000, The Assessment and Management of Risk in the Property Investment Industry, Investment Property Forum, London. Retrieved 10 October 2006, from www.ipf.org.uk/resources/pdf/research/research reports/RiskReport.pdf
  • IPF 2002, Risk Management for Real Estate Investment Portfolios: Summary Report, Investment Property Forum, London. Retrieved 8 October 2006, from www.ipf.org.uk/servlet.cgi?page id=336
  • IVSC 2006, The Valuation of Real Estate Serving As Collateral for Securitised Instruments, International Valuation Standards Committee, London.
  • Jones Lang LaSalle 2001, Commercial Mortgage Backed Securities: The New Kid on the Block, Sydney.
  • Jones Lang LaSalle 2006, Global Real Estate Transparency Index, Jones Lang LaSalle, Chicago.
  • Joslin, A. 2005, ‘An Investigation Into the Expression of Uncertainty in Property Valuations’, Journal of Property Investment & Finance, vol. 23, no. 3, pp. 269-285.
  • Lee, S. 2007, ‘Real Estate Portfolio Size in a Higher-moment World’, 13th Pacific Rim Real Estate Society Conference, 21-24 January, Fremantle.
  • Lorenz, D., Truck, S. & Lutzkendorf, T. 2006, ‘Addressing Risk and Uncertainty in Property Valuations: A Viewpoint from Germany’, Journal of Property Investment & Finance, vol. 24, no. 5, pp. 400-433.
  • Mallinson, M. & French, N. 2000, ‘Uncertainty in Property Valuation: The Nature and Relevance of Uncertainty and How It Might Be Measured and Reported’, Journal of Property Investment & Finance, vol. 18, no. 1, pp. 13-32.
  • Moody’s Investor Service 2003, CMBS: Moody’s Approach to Rating Australian CMBS, Moody’s Investors Service, Sydney.
  • Multiplex Property Trust 2005, Multiplex Property Trust Launches A$1 Billion CMBS Issue, Multiplex Property Trust, Sydney. Retrieved November 11, 2006, from http://www.multiplex.biz/page.asp?partid=294&ID=165
  • O’Sullivan, B. 1998, The Risks and Mitigants in Securitising Australian Commercial Mortgage Backed Securities, Master of Science Dissertation Thesis, University of Western Sydney.
  • Richardson, K. 2003, ‘CMBS Market Shaping For Another Growth Spurt’, Property Australia, vol. March, pp. 36-39.
  • RICS 1994, Commercial Property Valuations (Mallinson Report), Royal Institution of Chartered Surveyors, London.
  • Roche, T. 2002, ‘Commercial Mortgage-Backed Securities: A Homogeneous Asset Class?’ Australian Property Journal, no. August, pp. 170-174.
  • Shin, K. & Han, I. 2001, ‘A Case-Based Approach using Inductive Indexing for Corporate Bond Rating’, Decision Support Systems, vol. 32, no. 1, pp. 41-52.
  • Simonovski, J. 2003, A Brief Overview of Commercial Mortgage Backed Securitisation (CMBS) in Australia, Bachelor of Science Dissertation Thesis, University of Western Sydney.
  • Sing, T. F., Ong, E. S., Fan, G. & Sirmans, C. F. 2004, ‘Analysis of Credit Risks in Asset-Backed Securitization Transactions in Singapore’, Journal of Real Estate Finance and Economics, vol. 28, no. 2/3, pp. 235-253.
  • Standard & Poor’s 2003, Things That Matter: The Australian Commercial Real Estate-Backed Securities Market, Standard & Poor’s, Melbourne.
  • Standard & Poor’s 2005a, Australia & New Zealand CMBS Performance Watch, Standard & Poor’s, Melbourne.
  • Standard & Poor’s 2005b, Guide to Legal Issues in Rating Australian Securitisation, Standard & Poor’s, Sydney.
  • Standard & Poor’s 2005c, Multiplex CMBS Issuer Ltd. Series 2005-1, Standard and Poor’s, Melbourne.
  • Standard & Poor’s 2005d, Multiplex CMBS Issuer Ltd. Series 2005-2, Standard and Poor’s, Melbourne.
  • TEGoVA 2002, European Mortgage Securitisation: A Valuer’s Guide, European Group of Valuer’s Association, Brussels.
  • TEGoVA 2003, European Property and Market Rating: A Valuer’s Guide, European Group of Valuer’s Association, Brussels.
  • The Economist 2005, ‘Survey: Bothersome Basel’, in The Economist, vol. 371, pp. 5-7.