DTZ Research: Global debt funding gap in commercial property declines 17%

The global debt funding gap* is estimated to total US $202 bln. (approx. €136 billion) over the next three years (2011-2013) according to new research from DTZ. This represents a 17% reduction on the US $245 bln. estimated in November 2010.


Asia Pacific's debt funding gap increased to US $84 bln., with the vast majority of the increase attributable to Japan.

The latest report shows that despite the overall reduction in the global figure there are significant variations at a regional level. Both Europe and North America have seen a reduction in their debt funding gaps. In the United States, the funding gap is now estimated to be zero over 2011-2013, down from US $49 bln.

However, as the US $49 bln. was only 1% of invested stock, this change is not as dramatic as it appears given the strong capital value growth in the Q4 2010 and a decline in outstanding debt. In Europe, the debt funding gap decrease is a moderate reduction of US $8 bln. to US $109 bln. In contrast, Asia Pacific's debt funding gap increased US $14 bln. to US $84 bln., with the vast majority of the increase attributable to Japan.

At a country level, Japan has the largest absolute debt funding gap standing at US $84 bln., a US $14 bln. increase from the previous report. This is the result of a greater amount of debt to commercial real estate (up 10% since the end of 2009), and a decrease in forecasted capital values following the 2011 earthquake and subsequent tsunami. The UK debt funding gap has decreased by 22% to US $42 bln. Other European markets continue to have significant debt funding gaps including Spain, down by 14% to US $28 bln.

In broad terms, the debt funding gap is matched by new equity raised for investment in commercial real estate. DTZ Research estimates that US $403 bln. of new equity capital is available for investment in commercial real estate markets globally during the next three years. This is nearly double the US $202 bln. debt funding gap estimated for the same period. As noted in previous reports, difficulties remain in respect of a direct match between debt and equity available including the inability of some funds to invest in debt positions. However, there are a growing number of funds that have been raising equity specifically to target real estate debt.

A number of alternative solutions to bridge the debt funding gap have been implemented in recent months, as banks increasingly look to delever. In addition to 'extend and amend' practices, loan sales have become an increasingly popular way for banks to reduce their lending exposures. This approach has been widespread in the US, but is becoming more prevalent in Europe and Japan.

Another approach is for banks to make provisions on known bad loans – taking potential future losses down to the level of the value expected to be recovered. These provisions can help reduce the debt funding gap by decreasing the notional amount of debt outstanding.

Nigel Almond, Associate Director of Forecasting & Strategy at DTZ and author of the report comments: "Our analysis shows that Europe continues to have the

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