The debt funding gap across Europe is expected to reach 115bn over the next two years said DTZ Research in its latest report issued today. This gap varies across countries, but 56% of the European debt funding gap is estimated to be in only two countries, the UK and Spain. France, Germany, Italy and Ireland account for a further 28%.
Nigel Almond of DTZ Research and co-author of the report says: "Naturally, the larger markets have higher absolute levels of outstanding debt than smaller markets. Therefore, it makes sense for these markets to also have higher funding gaps. However, in terms of relative exposures, comparing the funding gap to the invested stock is a more appropriate relative measure. On this basis, the UK and Spain both have high absolute funding gaps, which are also high compared to their overall invested stock at 7% and 8%, respectively. In contrast, Germany and France have more modest relative debt funding gaps at 2% and 3%. Ireland has a 10% relative debt funding gap, the highest in Europe."
Based on a separate analysis, DTZ Research estimates there to be 58bn of equity available to target direct real estate in Europe in each of the next two years. The new 116bn equity is sufficient to finance the European debt funding gap in the next two years. But, since the equity has been available for some time and the debt funding gap remains, it does trigger the question - why has the debt funding gap not been resolved yet with all this available equity?
Said Kostis Papadopoulos of DTZ Research and co-author of the report : "There have been a number of obstacles, both on the equity as well as the debt side, that have so far prevented the effective matching up of the available new equity to finance the debt funding gap. On the equity side, there has been a divide in the type of opportunities that investors are seeking."
Many global, opportunity-driven fund managers are keen to invest in bank's loan portfolios. But, their high total return requirements would only be met if banks sell loans at significant discounts to par. "On the other hand, most institutional investors are focused on investing in prime properties in core markets. Also, many of these institutions do not have to ability to buy loan positions," said Mr Papadopoulos.
The DTZ Research report reveals that these factors have created a stand-off with banks reluctant to sell at distressed prices. Equity investors have been unwilling to buy loans at non-distressed prices and as a result the funding gap has not been resolved so far.
Said Nigel Almond: "We have recently seen a number of pressures building up for both the equity and debt sides to become more incentivized to find solutions. On the equity side, we see pressures from the limited commitment periods and possible further downside in the letting markets. On the debt side, we expect policy unwinds, reserve requirements and continuing problems with wholesale funding markets. "
The DTZ Research report notes that there have already been a wide range of different solutions put in place. The report categorizes these recent deal solutions seen across various deals in Europe, which together offer a possible solutions to the debt funding gap: the first is a pure debt solution which includes a mixture of restructuring, including extension of maturity, selling the loan to a third party and foreclosure. The second is a pure equity solution whereby the existing borrower injects new equity or a new equity partner injects equity and thirdly, a hybrid equity-debt solution with a debt for equity swap.
DTZ Research expects on the equity side to see existing equity investors to initiate negotiations along a number of different fronts. Also, the report anticipates resistance to giving concessions to previously generous 'extend and pretend' lenders. On the debt side, state-controlled banks are expected to show more consistency than the smaller banks. Smaller lenders are seen to act sooner to avoid being caught in the potentially increased volumes from the big banks. Banks might also sell