Sufficient new capital to bridge EUR 180bn funding gap: DTZ

Europe has the biggest exposure to property debt worldwide, accounting for 51% or $126 bn (EUR 92 bn) of the total $245 bn (EUR 179 bn) debt funding gap over the next three years, according to new research from property adviser DTZ. Second in line is Asia Pacific with 29% ($70 bn), followed by the US with 20% ($49 bn).

Among individual countries, the largest absolute debt funding gap is in Japan ($70 bn), followed by the UK ($54 bn), the US ($49 bn) and Spain ($33 bn). The remaining markets, including Germany and France, have absolute debt funding gaps below $10 bn. Relative to the size of their markets, many smaller European markets have significant funding gaps, especially Ireland.

New equity raised could be a significant part of the solution for the debt funding gap, says DTZ. The adviser estimates that $376 bn of new equity capital is available for investment in commercial real estate markets globally during the next three years. This is more than 1.5 times the estimated global debt funding gap. However, a number of obstacles remain that prevent a direct and short-term match between the debt funding gap and newly available equity. For example, many investors do not have the ability to buy loans. In addition, loans have not been priced attractively enough to meet the required returns of investors.

Nigel Almond, Associate Director of Forecasting & Strategy at DTZ and author of the report claims that the extent of the debt funding gap and the exposure of individual countries, especially in Europe, is primarily driven by the divergence in loan maturity market conventions. 'In the US, loan maturities are on average 10 years, which has left the US market relatively insulated against the capital value falls of recent years. In contrast, loan maturities in Europe and Japan are on average five and three years, respectively. Therefore, these markets have proven to be far more exposed to the recent value declines. Furthermore, scheduled amortisation and fixed rates are offering the US a significant advantage in tackling the funding gap.'

While banks and borrowers have not so far been forced to seek more dramatic solutions to the debt funding gap, a number of imminent changes look set to increase the pressure, according to Hans Vrensen, Global Head of DTZ Research. 'Recently, we have seen an increase in government and other activity to start to address the debt funding gap with an increasing array of innovative solutions. Banks have been moving on from extend and pretend to extend and amend. Loan maturity extensions are progressively being replaced by an extension coupled with an amendment of the base loan terms and covenant. Banks are also forcing full cash trapping to ensure any excess revenue from a secured property is used for amortisation of the loan.'

As governments focus on reducing their sovereign debt, a potential unwinding of accommodating fiscal and monetary policies will put more pressure on banks to deal with their most problematic loan positions, he added. 'New regulatory changes will also increase pressure for equity investors. As a result, we expect that market participants will continue to implement a range of innovative solutions in a prolonged messy workout process.'