New research from asset manager AEW suggests that Europe is the region most challenged by the imminent refinancing wall in real estate.
The firm's first global Debt Funding Gap (DFG) analysis provides insights on the relative refinancing challenges faced by Europe, the US and Asia Pacific.
According to the research, Europe leads with the largest DFG on a relative basis, standing at 16% of loan originations, closely followed by the US at 14%, with Asia Pacific remaining relatively immune.
Office loans consistently emerge as the primary concern across all three regions, followed by multi-family and retail sectors, which experienced significant capital value declines during the recent economic cycle.
Europe
In Europe Germany and the Nordics exhibit the highest DFGs at over 22% and 18%, respectively, while the UK and Southern Europe are best placed at 9% and 11%, respectively.
Notably, the DFG for Europe is projected to return to 2024 levels in 2026 after a substantial decline in 2025, attributed to the rebound in 2021 acquisitions and our assumption of uniform 5-year loan maturities.
Other regions
Despite the US seeing similar value declines to Europe, detailed loan maturity data for 2024-26 contributes to a declining DFG in 2025 and 2026, compared to 2024.
Sector-wise, offices and retail in the US show relative DFGs of 37% and 29%, presenting significant variations from the 14% US average. Conversely, loans backed by industrial collateral exhibit a lower relative DFG.
There is a more diverse landscape in the APAC region, meanwhile, with major markets such as Australia, Singapore, South Korea and Japan, as well as Tier 1 cities in China, all facing a DFG 7.6%, lower than that both the US and Europe.
Notably, around 60% of APAC's DFG is concentrated in the office markets of Australia and Tier 1 cities in China, with an additional 30% in the retail sector. The shorter 3-year loan tenures in APAC and the slow adjustment of property valuations/pricing contribute to the region's comparatively low relative DFG.
Hans Vrensen, Head of AEW research & strategy commented: 'This is the first time we’ve expanded our DFG analysis to show the extent of the refinancing challenge globally. Europe has the widest gap, closely followed by US with Asia relatively immune. Unsurprisingly the office sector shows the widest gap.
'This is particularly the case in the US where the post covid return to work is significantly behind the rest of the world putting pressure on the asset class and restricting appetite for lenders and investors alike.
'With many commentators believing interest rates have peaked and some early confidence returning to the market, 2024 will be a critical year for real estate globally. In the end, the scale of the DFG challenge and its impact on local markets ultimately depends on investors and lenders’ ability to cure associated defaults and absorb potential losses.'
