€115bn debt funding gap eliminated within 4 years

Europe’s €115 billion debt funding gap could be eradicated in just two years as a €116 billion wall of equity eyes real estate investment opportunities in the region.

With more than €482 billion of commercial mortgages due for refinancing in Europe in 2010 and 2010, real estate consultant DTZ has projected the region will face a best case shortfall in available debt capital of €115 billion over the next two years, with a worst case estimate of €156 billion.

Roughly €116 billion of new equity is expected to be available for investment in European property over the same period, however, prompting the firm to predict the funding gap will be “resolve[d] … in the next two to four years”.

DTZ warned there were a number of obstacles preventing equity investors, borrowers and lenders from reaching a “resolution in matching up the debt funding gap with the new equity available”, not least fund managers’ need to make 20 percent-plus returns and banks’ willingness to extend maturity loans and avoid immediate mark-to-market write downs.

“In the end, these trends and policies have resulted in a stand-off between debt and equity over the last two years,” the report, DTZ Insight: European debt funding gap, said. “In short, European banks have not wanted to and have not been forced to sell loan books at distressed prices. Equity investors have not been allowed to or have not wanted to buy existing loans at non-distressed prices, especially if the pricing did not allow them to meet their target returns.”

Investors though would target countries such as the UK and Spain, where the debt funding gap will be greatest. In the UK, the debt funding gap is expected to top €42 billion in 2010 and 2011 – accounting for 36 percent of the European total. The amount of new equity eyeing investments in the country is believed to be around €39 billion over the same period – just €3 billion short of clearing the UK’s debt funding gap. Under DTZ’s worst case scenario, the UK would have a €10 billion mismatch between the new equity available and the debt funding gap in 2010 and 2011.

Spain has the second largest debt funding gap of roughly €23 billion or 20 percent of the European total. France, Germany, Italy and Ireland account for a further 28 percent.