Europe Progresses in Debt Workout

CRE Finance World, Winter 2014

Europe Progresses in Debt Workout A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 61 n the wake of the global financial crisis Europe’s commercial real estate markets have struggled under the weight of debt and refinancing requirements. Falling values and lower loan to value ratios has left a funding gap. We define this as the gap between the debt available at refinance and the outstanding loan balance at the point of refinance. Across Europe this totals USD74bn over 2013-14. This figure is now shrinking, down 14% compared to June 2013 as an improving capital value outlook is helping to support the amount of debt available at refinance. At the same time many banks are actively deleveraging, notably in the UK and Spain and to a lesser extent elsewhere. This is evidenced by the significant amount of debt still outstanding to CRE. Having peaked in 2008 at USD2.8tn, it has subsequently shrunk 12% in dollar terms to USD2.5tn by year end 2012 (Exhibit 1). Much of this fall reflects currency movements. In Euros the actual amount has remained flat at close to EUR1.8tn. Central bank liquidity supports across Europe provided to the banking sector have delayed the necessary deleveraging process in many markets. Banks are also feeling the pressure from growing regulation, requiring them to set aside higher amounts of capital against their existing loan books. At the same time we also see growing interest from alterative lenders which is having a more positive impact on the market in a growing number of markets. But where are the opportunities and risks? Exhibit 1 European Outstanding Debt to Real Estate USDtn Source: DTZ Research European Refinancing Gap Since 2010, we have attempted to quantify the scale of the problem by estimating the refinancing gap. This is the gap between the outstanding debt balance and the debt we estimate to be available at the point of refinance. Our methodology for estimating the base refinancing gap involves a detailed analysis which takes into account: • Vintage of outstanding loans • Duration of loans by vintage • Loan to value ratios at origination and maturity by vintage • Historic and future changes in collateral values, and • Impact of loan maturity extensions Based on our latest analysis the European refinancing gap for 2013-2014 has fallen 14% from USD86bn in June 2013 to USD74bn in November 2013 (Exhibit 2). Declines have been observed in many individual European markets. The UK’s gap fell 21% to USD23bn. This partly reflects a more detailed approach to our analysis in the UK where we now estimate gaps by quality grade of propertyi. Both Spain and Ireland, whose large gaps, fell 10% and 20% respectively over the last six months. Of the major markets, France registered an increase in its gap from USD1.3bn to USD2.3bn. Exhibit 2 European Refinancing Gap 2013–14, USD bn Source: DTZ Research I Hans Vrensen Global Head of Research DTZ Nigel Almond Head of Strategy Research DTZ


CRE Finance World, Winter 2014
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