François Trausch, the chief executive officer and chief investment officer of PIMCO Prime Real Estate, part of the California-based asset manager PIMCO, has warned Europe’s refinancing crisis will “get worse” in the coming months, requiring billions of rescue capital from banks and alternative debt providers.
Speaking on April 16 at the PERE Network Europe Forum event in London, Trausch said: “If rates stay where they are and do not come down as quickly as expected then of course, you are going to have another issue… which is the funding gap.”
He explained borrowers will struggle “in large numbers” as loans come to maturity in an environment in which capital values and net operating income declines were being experienced in tandem with lower available loan-to-value ratios and higher debts costs, creating a “tsunami” of refinancing requirements.
Trausch told the event: “Commercial banks, in Europe at least, are not encouraged to lend [against] real estate. So, you can see we are going to have an issue of refinancing coming and I guess a lot of the money available in the market will be concentrating not so much on new deals but on fixing these types of problems…
“We are in the middle of [the crisis]. It is not over and it is going to get worse before it gets better. So, mind the funding gap.”
The debt funding gap for Europe’s real estate market is estimated to be $40 billion in 2024, with the same refinancing shortfall materialising again in 2026; in 2025 the funding gap will be $25 billion, according to latest estimates from manager AEW.
Trausch added real estate would also face continued headwinds in the form of not being able to improve rental income as inflation lowers. He said PIMCO’s research showed half of the real estate sectors across the globe would experience rental growth “well below” inflation.
He explained: “And that is going to be, of course, an issue, because we cannot count on rental growth to help net operating income going forward.”
However, Trausch said most of the capital value adjustment in real estate has already occurred: “I would say 80 percent of the adjustment is done… A 25 basis points adjustment when you go from 5 to 6 percent is much less painful than [the same adjustment] when you go from 4 to 5 percent. So whatever adjustment is still to come is going to be less painful than before – that’s the good news.”
He said the market dynamics meant PIMCO was “extremely focused” on lending strategies.
In the first three quarters of 2023, the asset manager, which has a real estate loan book of €16.1 billion, issued €1.35 billion to European property markets including Germany, France, UK, Ireland, Belgium and Spain – compared with €3.85 billion it lent in 2022, according to affiliate title Real Estate Europe’s Active Lenders 2023 report.
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