The European real estate debt funding gap (DFG) now stands at an estimated €93bn, reveals newly expanded research released today by AEW – but the UK has surprisingly emerged as having the smallest DFG of the six countries analysed.
The DFG, which represents the shortfall between the original amount of secured CRE debt originated between 2018 and 2021 and the amount available for refinance at the loan maturity for the 2023 to 2026 period, has shot up from an estimated €51bn in March.
However, this reflects the research’s expansion to include additional commercial real estate loan vintages from 2021 and three new countries – the Netherlands, Italy and Spain – alongside the original three of the UK, France and Germany.
Of the six countries analysed, France has the largest DFG, at €19bn, representing 30% of all loan originations – well above the six-country average of 21% – while the UK and Italy come out below average at 14% and 18% of loan originations respectively.
The research also reveals that debt financing used to fund new acquisitions fell by 16% to €142bn between 2021 and 2022 due to the increases in all-in interest rates. Meanwhile, all-in borrowing costs reached a new 20-year high in European real estate, more than doubling in 18 months to 5.9% by the middle of 2023, with Sterling-based borrowers still facing elevated debt costs of 6.8%. AEW said it expected LTVs to stabilise at 50% by the end of 2023.
Hans Vrensen, managing director and head of research and strategy Europe at AEW, said: “While commercial real estate lending shows signs of stabilising, the significant increase in all-in interest rates has made debt less attractive for the majority of leveraged equity investors, while equity investors have paused for thought until prices and valuations settle. Declining collateral values and lower LTVs in a higher interest rate environment are likely to trigger significant refinancing challenges.”
He added: “For the first time, we analysed the DFG as a percentage of total loan originations, ranking each country on a relative basis. Surprisingly, Italy and UK come out below average, while France has the largest DFG. However, while we may be some time away from LTVs stablising, the world is in a different place compared to the post-GFC era. This time, European banks are sufficiently capitalised to absorb the level of predicted losses according to our analysis.”
