UK investment-grade commercial mortgage-backed securities (CMBS) are capable of withstanding a return to the negative property market conditions of 2000-2003 with minimal losses, according to rating agency Fitch.

A more severe downturn of the magnitude of the early 1990s’ recession would see aggregate portfolio losses of 7.5%, although virtually no losses are seen for bonds rated ‘AAA’ in this scenario.

The aim of the analysis undertaken by Fitch was to determine the losses that could be expected on UK CMBS transactions as a result of property value stresses, simulated by applying yields and rental values in line with levels in past market downturns.

Fitch used the mild scenario, reflecting current property market conditions, the moderate scenario, reflecting property market conditions in 2000-2003 and the severe scenario, reflecting property market conditions in 1990-1993.

‘Almost three times as many investment grade tranches are affected in the severe scenario compared to the moderate scenario, highlighting the relative depth and breadth of the early 1990s’ recession,’ said Andrew Currie, head of EMEA CMBS at Fitch.

‘Sixty percent of UK CMBS will experience losses should the UK experience a property downturn of that magnitude; however, that would lead to just a 0.3% loss at the ‘AAA’ level, with just three ‘AAA’ tranches affected.’

The research covers £32.8bn of notes from 67 CMBS issues, comprising 263 loans.