DTZ today announced the European net debt funding gap has shrunk by 42% to USD50bn from our previous Nov-12 estimate of USD86bn[1]. The remaining non-European gross debt funding gap of USD22bn is in Asia Pacific which we expect to fall to a net USD5bn. As before, we estimate there to be no funding gap in the Americas.
Compared to a year ago deleveraging is now well underway in many major markets across Europe which is helping to reduce the refinancing burden. Europe continues to stand out as the most problematic regions with its gross debt funding gap totalling USD163bn, albeit 14% lower on six months ago. It dwarfs Asia Pacific’s USD22bn gap. The reduction in Europe reflects progress in shrinking banks’ balance sheets Including, Germany, the UK, Italy, Spain and the Netherlands.
Nigel Almond, Head of Strategy Research at DTZ, and co-author of the report said: “In response to the crisis in Europe’s CRE debt markets we continue to see growing activity and interest from non-bank sources. In core European markets including the UK, France, Sweden and Germany we see a surplus funding gap emerging over the next two years as new lending capacity more than covers the gross gap. In Spain we see more limited new lending capacity leaving a significant USD17bn net funding gap. We also see smaller net gaps in Ireland, Italy and the Netherlands. This leaves a net funding gap of USD50bn across Europe as a whole.”
Whilst capacity is reduced in the near term as funds take longer to raise equity, we see stronger growth over the medium term with non-banks increasing their market share on permanent basis. We estimate funds and insurers will provide USD181bn of new lending capacity across Europe over 2013-15. This will push their share of outstanding debt across Europe as a whole from 2% to 7% in this period. We see the UK leading the way with non- banks growing their share from a current 7% to 15%.
Hans Vrensen, Global Head of Research at DTZ, comments: “The speed and magnitude of the growth in non-bank lending has been surprisingly strong. As we more closely assess the impact across each market, we expect that the bigger, core lending markets are likely to benefit more in the short term from this trend. Surplus capacity in some of these core markets will likely take some time to be re-directed or re-priced. But, we do expect this adjustment to happen in the next 2-3 years. We do see this as an important next phase in the European markets’ fundamental restructuring into a multi-channel funding model.”
Over the medium term, whilst we do see a reduction in the level of refinancing, our analysis suggest the refinancing burden may growth further reflecting recent loan extensions and limited growth in capital values. Whilst there is less certainty over these projections, the analysis does highlight the tail risks to the work out. In more exposed markets such as Ireland and in particular Spain which is only just establishing its bad bank, we see more of a greater tail risk. With a longer work-out of loans this may impact the speed of recovery.
Phil Glenn, Head of the Nottingham office comments: “Given the difficulties experienced in the property market in recent years and the resulting reduction in lending into property, it is encouraging that new entrants are coming in to the market, both bank and non-bank, as the debt market continues to evolve. It will be interesting to see what effects this will have in secondary markets and in the regions where there are opportunities for investors on higher yielding properties.”
