European funding gap €99bn – Germany’s is largest share

The European debt funding gap has reached €99 billion and Germany is in the worst position, delegates heard at Real Asset Media’s Debt Investment briefing, which took place recently in Frankfurt, hosted by Ashurst.

“We have done a step by step analysis and have estimated the total quantum of debt that is difficult to get refinanced,” said Hans Vrensen, AEW’s European head of research and strategy. “Our research gives us €99 billion as a top line number. Dividing that big number by the size of the market, it emerges that Germany has the biggest funding gap of any country that we have measured.”

AEW’s research covers 20 countries in Europe across different asset classes. France has the second-worst funding gap in Europe, followed by the Nordics, while the UK, Italy and Spain are in a relatively strong position.

“We have boiled it down to losses to make it less abstract, and our estimated total loss for all of European commercial real estate is 2.5% as a percentage of 2018-2021 loan origination across all sectors, which is not insignificant,” said Vrensen. “On the positive side, banks have been reserving against these upcoming losses so they will be protected from any major problems.”

Offices and retail account for most of the losses.

Looking at all 2019 loans secured for German office transactions that need to be refinanced in 2024, the volumes were €25 billion at 60% LTV. The capital value decline for that vintage of acquisitions has been €7 billion, so the new asset value is €18 billion.

“Assuming LTV is 55% when the refinancing takes place, the new debt that’s available for all those acquisitions is lower by about €5 billion, and that’s the funding gap,” he said. “In Germany even apartments, which we assumed were safe, are in trouble.”

The substantial change in capital values is behind the current situation.

“German institutional investors are showing very little appetite for lending”, said Matthias Thomas, business development and client relationships, Caerus Debt Investments. “The debt fund industry needs the repricing of loans. The market will pick up again only after a full repricing has taken place.”

There is little expectation of change in this transition year,

“Even if they are more restricted, lenders still want to do new deals and grow their book cross asset classes,” said Fabienne Hartmann vice president real estate financing, Loanboox real estate. “When it’s the perfect deal, a good asset, low LTV, high debt yield, everyone will go for it, but when it’s more complicated then it gets trickier.”

Some sectors like residential and logistics are likely to attract more interest and hotels are also popular, given the rebound in both tourism and business travel after the pandemic. There is more of a question mark over offices because of uncertainty over the working from home trend as well as the fear of obsolescence.

“It is very asset specific,” Hartmann said. “It is fine if an asset is ESG-compliant or can be managed to ESG, but if that is not possible it become stranded and there is no financing available for such an asset.”

Some institutions, especially in the UK and the Netherlands, are setting up green capex lending programmes. Some buildings are beyond redemption, but in many cases interventions are possible and sometimes require less capex than expected.

“There will always be assets we cannot finance, but if the location is good it is still worth refurbishing and upgrading an asset that is not ESG-compliant,” said Norbert Kellner head of syndication, Berlin Hyp. “There will be more and more opportunities to improve buildings and the financing will be found.”