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LONDON-The first commercial real estate CDOs are due to launch in Europe later this year, but agencies are finding it difficult to rate the debt vehicles. According to Standard & Poor's the most senior of CDO debt tranches will be able to get triple-A ratings. The agency has been exploring possible CRE CDOs for over a year, but the report added that there were still difficulties, particularly for managed deals where the assets can be changed. "Expressing a rating opinion on an ever-changing pool of junior debt is, frankly, very difficult," states Ronan Fox, one of the authors of the report. The instruments are commonly used in the UK by institutional investors to refinance their positions through the capital markets and are particularly popular among investors in subordinated positions in real estate loans or CMBS.

The report also warns that the kind of real estate expertise needed to manage European deals would be hard to find. The market in Europe has been slow to develop because of high rates of prepayment in European real estate loans. But now S&P believes the market in subordinated real estate loans and CMBS has reached a "critical mass."