Debt-funding gap may hit 115 bln euros by 2012

 

The gap between demand for real estate debt and credit offered by European banks may hit 115 billion euros ($154.6 billion) in the next two years, possibly slowing a broader market rebound, research out on Monday shows.

Real estate consultant DTZ's report found lenders are originating far fewer loans than the market wants, pending more shake-outs in their mortgage books, even as calm returns to commercial real estate pricing across Europe.

This gap varies across countries, but 56 percent of the European debt funding gap is estimated to relate to just two countries, the UK and Spain. France, Germany, Italy and Ireland account for a further 28 percent, the report showed.

Larger markets with higher absolute levels of outstanding debt have higher funding gaps than smaller markets.

In terms of relative exposures to overall stock invested, the report estimated Ireland has Europe's largest debt funding gap, at 10 percent, compared with 7 percent and 8 percent in the UK and Spain respectively.

In contrast, Germany and France have more modest relative debt funding gaps at 2 percent and 3 percent.

EQUITY PLUG

Based on a separate analysis, DTZ estimates there to be 58 billion euros of equity available to target direct real estate investment in Europe in each of the next two years.

This 116 billion euro war chest is sufficient to finance the European debt funding gap, but many opportunity-driven debt investors can only meet high total return requirements if banks sell loans at significant discounts to par, DTZ said.

"There have been a number of obstacles, both on the equity as well as the debt side, that have so far prevented the effective matching up of the available new equity to finance the debt funding gap," Kostis Papadopoulos, co-author of the report, said.

DTZ said both parties were slowly becoming more incentivised to resolve a stand-off over pricing as resistance to bank 'extend and pretend' strategies grows and smaller lenders move to sell unwanted loan stock before bigger banks come to market.

"On the equity side, we see pressures from the limited commitment periods and possible further downside in the letting markets," Co-Author Nigel Almond said.