DTZ sees debt funding gap rising 50%

The debt funding gap for commercial real estate in Europe is set to increase by up to 50% by 2014, or a total of $249bn (EUR 188.2 bn), as new regulations force European banks to deleverage, DTZ claims in its newly published Global Outlook for 2012.

While the new bank regulations add further downside risks for the property sector, new equity capital and non-bank lending should be sufficient to bridge the gap over the next three years, according to Hans Vrensen, Global Head of Research at DTZ. ‘However, a pricing correction for both debt and equity might be required to attract this available capital,’ he noted.

The new 9% capital reserve requirements faced by the banks are estimated to trigger additional deleveraging for European bank balances to the tune of EUR 1.5 to 3 tln. Europe’s debt funding gap (the difference between maturing legacy debt and new debt available to replace it) in the 2011-14 period represents an additional $83 bn, Vrensen said.

While the outlook for global commercial property markets has turned much less positive in 2012 after a stable performance last year, DTZ Research base case forecasts to 2016 are for steady capital values across most of Europe. The base scenario draws on research from Oxford Economics which estimates the likelihood of the eurozone ‘muddling through’ at about 45%, Vrensen said. The chances of a downside scenario are put at about 30% with a worst-case scenario seen as a Greek default triggering its departure from the Eurozone along with Italy, Spain, Portugal and Ireland. ‘The probability that all five countries will exit the Eurozone is quite small at 10%,’ Vrensen added.