A total of €640 bn in private real estate debt is estimated to have been originated across Europe between 2019 and 2022 - of this, €176 bn (27.5%) may not be refinanced when the debt matures over the next four years, based on current capital values and borrowing rates, according to the latest report from global real estate advisor, CBRE.
It said that rising interest rates and falling real estate values have led to tighter lending conditions in commercial real estate markets, with debt being 'less available and more costly'. As a result, investors face challenges in refinancing debt that was originated in the 2019-2022 period, and a funding gap is expected to arise for this debt as it comes due between 2024 and 2027.
CBRE explained a debt funding gap is the difference between the original amount borrowed and the amount of debt now available for the same asset.
The gap is expected to be widest in the office and multifamily sectors, at €82 bn and €68 bn respectively. Whilst the shortfall will be spread relatively evenly over the next four years in the office sector, the debt gap will be felt mostly in 2026 and 2027 for logistics and multifamily, reflecting the record levels of investment in these sectors that took place in 2021 and early 2022.
The gap for retail is smaller, but, as a percentage of the debt originated, high street retail has the largest gap at 30%, according to CBRE’s analysis.
The extent of the funding gap may be mitigated by lenders and borrowers working together to extend and amend terms as the loans come due.
Improvement factor
However, CBRE said it forecasts improved market conditions, which should mitigate some of the funding gap as interest rates begin to fall and values start to recover.
Tasos Vezyridis, head of thought leadership for Europe, said: 'Capital values are expected to recover and borrowers will once again have access to better financing terms.'
'Based on our in-house forecasts, the debt funding gap will reduce by €62 bn to €114 bn during the 2024-2027 period, a reduction of 35%. While relief from the funding gap will be limited in next couple of years, the impact will be markedly less pronounced in 2026 and 2027 based on a forecasted recovery of values and lower interest rates.'
Multifamily, office and logistics are expected to see the largest absolute declines in the debt funding gaps due to recovering capital values with reductions of €30 bn, €20 bn and €11 bn, respectively. Retail on the other hand is expected to see the slowest reduction, which is largely due to a forecast of relatively stable values moving forward.
Chris Gow, head of debt & structured finance, said: 'These estimates provide a broad gauge for the scale of the refinancing issue and indicate the sectors and markets facing the largest challenges.'
'In practice, we should recognise that lenders and borrowers have been agreeing loan extensions and amendments to allow more time for the market to stabilise and for funding issues to be resolved in an orderly way.'
'The scheduled maturity date provides an opportunity for lenders and borrowers to assess the situation and determine the best way forward, whether that is through capital restructuring, asset sales or, in the most challenging cases, through write-downs of the original sum borrowed. These real-world processes will smooth out and perhaps reduce the debt funding gap we anticipate today, but it is clear that the market will still face a significant funding challenge over the next few years.'
