Pictured above: Nick Allan
DTZ Research estimates that the global debt funding gap totals
US$245bn over the next three years (2011-2013). This gap is defined
as the difference between the existing debt balance secured by
commercial property as it matures, and the debt available to
replace it.
The debt funding gap continues to be the biggest challenge in
many international property markets. The report shows that Europe
has the greatest exposure, with 51% of the debt funding gap
(US$126bn), followed by Asia Pacific with 29% (US$70bn) and the US
with 20% (US$49bn).
Among individual countries, the largest absolute debt funding
gap is in Japan (US$70bn), followed by the UK (US$54bn), the US
(US$49bn) and Spain (US$33bn). The remaining markets, including
Germany and France, have absolute debt funding gaps below US$10bn.
Relative to the size of their markets, many smaller European
markets have significant funding gaps, especially Ireland.
Nick Allan, Investment Director at DTZ in Birmingham, comments:
"Most UK banks are under significant pressure to reduce their
property loan book and it is apparent that a number are taking
action to deal with these loans. They have widened the scope of
their review, which was initially on loans in payment breaches, to
include those which are only in breach of loan to value
covenants.
The individual banks are taking different approaches to dealing
with lenders, with some exerting pressure on the borrower to finder
purchasers through a consensual sale to get a resolution, rather
than using foreclosure.
In 2011, banks will also be looking closely at any loans that
are due to mature. The UK has typical loan terms of five years, so
many of these maturing loans will be for property purchased in 2006
and 2007 at the height of the market. In many cases, current value
will not match that paid for the property.
The secondary market is facing the greatest pressure and while
there is no expectation of a sudden flood of product into the
market, DTZ is already working on sales for early 2011 on behalf of
several lenders."
An additional factor influencing the debt funding gap is that
secondary properties are likely facing a much higher refinancing
risk than prime properties. Based on limited data, yields on
secondary assets have widened more relative to prime assets. Given
current risk aversion, investors and lenders are targeting prime
properties with demand for secondary assets remaining very low. As
a result, values on secondary assets have not recovered as quickly
as prime, leaving these assets more exposed. The risk of secondary
properties' cash flows being impacted by insufficient capital
expenditure is a further risk. This could pose a double threat to
secondary quality collateral and the associated loans.
New equity raised could be a significant part of the solution
for the debt funding gap. DTZ Research estimates that US$376bn of
new equity capital is available for investment in commercial real
estate markets globally during the next three years[1]. 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 comments: "Our research highlights
the extent of the debt funding gap and the exposure of individual
countries, especially in Europe. This 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."
Hans Vrensen, Global Head of DTZ Research, said: "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.
[1] DTZ Insight: The Great Wall of Money, 13 October 2010