Global funding gap shrinks by 17%, says DTZ

The global debt funding gap is estimated to total $202 bn (EUR 136 bn) over the next three years, down 17% on an estimated of $245 bn made in November 2010, according to new research from DTZ.

Asia Pacific's debt funding gap increased to $84 bn, with the vast majority of the increase attributable to Japan, while both Europe and North America have seen a reduction in their debt funding gaps. In Europe, the debt funding gap decrease is a moderate reduction of $8 bn to $109 bn. The UK debt funding gap has decreased by 22% to $42 bn. Other European markets continue to have significant debt funding gaps including Spain, down by 14% to $28 bn.

'Our analysis shows that Europe continues to have the largest debt funding gap. However, it is also the region with the lowest ratio of debt funding gap to available equity. We anticipate that banks will make provisions against further losses,' said Nigel Almond, associate director of Forecasting & Strategy at DTZ.

In the US, the funding gap is now estimated to be zero over 2011-2013, down from $49 bn.

In broad terms, the debt funding gap is matched by new equity raised for investment in commercial real estate. DTZ Research estimates that $403 bn of new equity capital is available for investment in commercial real estate markets globally during the next three years. This is nearly double the $202 bn debt funding gap estimated for the same period. Difficulties remain in respect of a direct match between debt and equity available including the inability of some funds to invest in debt positions. However, there are a growing number of funds that have been raising equity specifically to target real estate debt.

A number of alternative solutions to bridge the debt funding gap have been implemented in recent months, as banks increasingly look to delever. In addition to 'extend and amend' practices, loan sales have become an increasingly popular way for banks to reduce their lending exposures. This approach has been widespread in the US, but is becoming more prevalent in Europe and Japan. Another approach is for banks to make provisions on known bad loans - taking potential future losses down to the level of the value expected to be recovered. These provisions can help reduce the debt funding gap by decreasing the notional amount of debt outstanding.

Furthermore, since the previous report, there has been a marked increase in non-bank lender activity. In particular, insurance companies focusing on new lending and funds seeking to invest in loan positions or to provide mezzanine finance. The former has been driven in part by Solvency II, incentivising European insurers more towards real estate lending.

DTZ estimates that existing and new insurance companies and pension funds entering the European lending market will provide $80 bn of lending capacity. This brings badly needed funding capacity and more diverse funding channels to the sector. In fact, the $80 bn in additional funding equals over 8% of the refinancing requirement over the next three years.