Europe faces the biggest property debt funding gap globally, at $118bn over the next three years, according to DTZ. It also lacks the most available equity, proportionate to the shortfall. The UK is up against the biggest challenge, with a gap of $42bn; followed by Spain at $28bn; and Ireland at $12bn.
On the other hand, banks are likely to make provisions on bad loans, taking potential future losses down to the level of the value expected to be recovered. RBS, for example, has made provisions of close to 8% of its total outstanding loanbook, according to its annual report.
Loan provisioning generally could reduce Europe’s funding gap by decreasing the notional amount of debt outstanding by 8% to $109bn. Furthermore, another 8% of the refinancing required could come from insurance companies like AXA and Allianz entering Europe’s lending market.
DTZ defines the debt funding gap as the difference between the existing debt balance and the debt available to replace it. With a 1.2 ratio between available equity to debt funding, there is enough equity available; “it just needs to be joined up with the gap”, said Hans Vrensen, DTZ’s global head of research.
He believes one reason this has not happened is because government monetary policies have been generous in providing liquidity, allowing the banks to ‘hang in there’. In North America, the $49bn debt funding gap has vanished, due to a 6% fall in outstanding debt and a 9% rise in forecasted capital values, and there is plenty of equity, at $122bn.
“We could see some equity coming from North America, depending on pricing and how these solutions are being implemented, to help deal with the funding gap in Europe,” said Nigel Almond, author of the report. The global level of available capital is more than $400bn, compared with a global debt funding gap of just over $200bn. “This means there are two dollars of available capital for each dollar of debt funding gap,” added Almond.