European real estate debt funding gap (DFG) grew to €51bn in the final quarter of 2022, according to the latest research from AEW.
The DFG is the shortfall between the original amount of secured debt originated in 2018-20 and the amount available for refinance at the loan maturity in the next three years across all sectors in Germany, the UK and France.
Hans Vrensen, head of research and strategy at AEW, said: “Our analysis shows the European DFG grew to €51bn in the final quarter of 2022, reflecting lower collateral values and interest coverage ratio restrictions which are starting to take hold.
“Taking the estimated LTV-related DFG, this number has increased by circa 33% to €32bn since our last analysis in September 2022, driven by capital value declines coming through much more quickly than previously anticipated.”
The LTV-related DFG increase was driven mostly by lower collateral value projections impacting more sectors with 11 of 12 covered property sectors across three countries compared with only six in AEW’s previous projections.
AEW said lenders and borrowers would need to be creative in restructuring the capital stack to bridge the widened gap and reach sustainable LTV and ICR levels.
Vrensen added: “Lenders and borrowers will need to adopt a far more proactive approach as the market is faced with a different set of challenges than during the GFC in respect to inflation, higher interest rates and new regulations.
“The regulatory requirement for banks to hedge loans could be the trigger the market needs to bridge the mounting bid-ask spread in the current downcycle. This is likely to force a quicker work-out of upcoming loan maturities compared to the GFC, since extending maturing loans without fixing the rate at higher swap rates is unlikely to be an option this time around.”
