CBRE forecasts €176bn peak for Europe’s debt funding gap

The property consultant expects tight lending conditions to impact borrowers for the next three years.

A new report from CBRE has attempted to size the European funding gap, with the property consultant projecting that around €176 billion – or about one-third of loans maturing over the next four years – may not be refinanced.

CBRE’s estimates, based on current capital values and borrowing rates, are that 27.5 percent of the €640 billion in private real estate debt originated for European borrowers between 2019 and 2022 may not find new capital when it matures between 2024 and 2027.

This resulting shortfall comes as lenders and borrowers are facing tighter lending conditions, increased interest rates and falling real estate values, according to the company’s analysis.

CBRE predicts the funding gap will be largest in the office and multifamily sectors, at €82 billion and €68 billion respectively. It also identified acute refinancing challenges for logistics and multifamily during 2026 and 2027, owing to the record levels of investment in these sectors that took place during 2021 and early 2022. It has calculated 30 percent of the debt funding gap in the retail sector will be accounted for by high street shops.

Previous estimates have put a smaller figure on Europe’s debt funding gap, albeit for a different time period. Real estate investment manager AEW said in August the region faced a €93 billion debt funding gap for loans maturing during 2023 and 2026.

Tasos Vezyridis, head of thought leadership for Europe at CBRE, said there are nuances within the data. “While relief from the funding gap will be limited in next couple of years, the impact will be markedly less pronounced in 2026 and 2027 based on a forecasted recovery of values and lower interest rates,” he said.

Real Estate Capital Europe reported in November that while private debt managers have been primed to bridge the refinancing gap, they have seen a limited volume of transactions because borrowers are struggling with increased debt costs and falling values.

But Chris Gow, head of debt and structured finance Europe at CBRE, said he believes the extent of the funding gap may be mitigated by lenders and borrowers working together to extend and amend terms as the loans come due.

“These estimates provide a broad gauge for the scale of the refinancing issue and indicate the sectors and markets facing the largest challenges,” Gow noted. “In practice, we should recognise that lenders and borrowers have been agreeing loan extensions and amendments to allow more time for the market to stabilise and for funding issues to be resolved in an orderly way.”

Gow said lenders and borrowers would use scheduled maturity dates to assess solutions, whether that is through capital restructuring, asset sales or “in the most challenging cases, through write-downs of the original sum borrowed”.

He added: “These real-world processes will smooth out and perhaps reduce the debt funding gap we anticipate today, but it is clear that the market will still face a significant funding challenge over the next few years.”