EUROPE - DTZ has more than doubled its forecast for the European debt funding gap to $182bn (€140.5bn) to take into account new European Banking Authority (EBA) rules requiring banks to increase their tier-one capital ratios.

The impact will be greater in markets that previously had smaller funding gaps, such as France, Germany and the Netherlands, according to DTZ global head of research Hans Vrensen.

Germany is now looking at a debt funding gap of $26bn, France $25bn and the Netherlands $10bn.

Although there is sufficient equity globally to bridge the funding gap - DTZ believes non-bank lending in Europe will reduce the net funding gap to $107bn - the margin in Europe is "less favourable".

"There is sufficient equity to plug the debt funding gap for the next two years - assuming the equity being targeted matches the debt, which is not always the case, and that pricing mismatches can be overcome," Vrensen said.

Nigel Almond, associate director of forecasting and strategy, added: "The liquidity support given to banks in Europe has helped to delay the deleveraging of their balance sheets.
"But while debt has been rising, so too has equity - and, in fact, at a faster pace.

"The good news for the market and investors is that the faster growth in equity has meant the leveraging continued in 2011, but the pace did slow during the year."

European debt increased by 5% over 2011, but negative sentiment driven by regulation has tightened lending conditions, and Almond forecast loan terms would likely tighten in 2012.

A recent DTZ investor intentions survey found a sixfold increase in the number of investors that expected a tightening of loan terms in 2012 as a result of regulation, including EBA rules. 

Almond said: "Although we expect some easing in the pressure next year, loan terms will remain elevated."

In the meantime, progress on existing loan work-outs has been steady.

Only 15% of banks polled by DTZ have yet to start working out their prime loans, down from 20% a year ago.

Non-prime workouts have still a way to go, but the percentage of lenders yet to get started on working them out has dropped from 53% last year to 43% in 2012.

Vrensen said he expected to see deeper discounts as banks switched to their secondary assets.

He cited Nama's Orion portfolio, which at €300m sold for 50% lower than the target price, and the Bundesbank's Excalibur, which sold for €279m, at a discount of 35%. 

As private equity appetite for portfolios above €1bn wanes, the market will also see a shift towards sales of smaller loans.

A recent report from the IMF suggested EBA rules on tier-one capital ratios could reduce bank assets by 6-10%.

DTZ adopted as its base case for 2012-13 the second of the IMF's scenarios, in which systemic risks are averted, but investor confidence remains fragile and funding concerns force banks to shed assets.

In the commercial real estate market, DTZ estimates mortgage lending will decline by 7% - the same figure the IMF forecasts for banks' overall assets.

However, Almond acknowledged the assumption could be overly optimistic given that banks are likely to prioritise reduction of the largest loans - which could result in speedier-than-predicted deleveraging - and state-owned banks would gain no political benefit from commercial real estate lending.