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The UK posted a 55% reduction in its net debt funding gap over the last six
months. This is well ahead of Europe as a whole which posted a 20% decline and the global gap down 17% over the same period. Europe continues to have the highest gap at USD86bn, with the remaining USD31bn in Asia Pacific. As before, we estimate there to be no funding gap in the Americas (Figure 1).
In our four step analysis, the net decline occurred despite the negative impact
of new banking regulations. These regulations are estimated to more than double Europes refinancing gap of USD82bn to a gross debt funding gap of USD190bn. France, Germany and the Netherlands are most significantly impacted by these pending regulatory pressures.
A dramatic 45% increase in new non-bank lending reverses this regulatory
impact. Over the last six months, we note an increase as well as greater diversity in new non-bank funding. We are now aware of over ten insurance companies and over 30 funds providing debt financing. As before, we expect these groups to provide USD75bn of additional lending capacity over 2012-13. In addition, we estimate that continued growth in corporate bond issuance could provide an additional USD29bn of net new funding.
In the near term, we expect two thirds of the non-bank activity to come from
insurance companies. But, the growth in fund raising by fund managers should see a more even balance in lending capacity by 2015. In aggregate we forecast USD225bn of new lending capacity from insurers and funds over 2013-15. With the European net funding gap having shrunk by more than half by the end of 2013, we project that by the end of 2015 a majority of the work-out will have been completed. In the UK this could be earlier. We expect the tail end of the work out to take longer to complete representing 10-15% of the funding gap. This is on the assumption of available non-bank lending, continued low base rates and no further regulatory changes.
Figure 1
Author
Nigel Almond Head of Strategy Research +44 (0)20 3296 2328 nigel.almond@dtz.com
160 120
Asia Pacific
Contact
Hans Vrensen Global Head of Research +44 (0)20 3296 2159 hans.vrensen@dtz.com
-20%
80
Europe
Europe
40 0 Europe
Global Global
DTZ Research
Introduction
This is the fifth issue of our Global Debt Funding Gap report and provides an update on our previous analysis released in May 2012. Compared to our previous report, the amount of debt outstanding in each market remains unchanged, based upon data from our Money into Property database at the end of 2011. Since our last report we have made adjustments to some of the inputs based on discussions with our research and deal teams locally and also updated information provided in the year-end 2011 De Montfort University survey on UK 1 commercial property lending . Our methodology for estimating the debt funding gap remains unchanged. As before, it involves a detailed analysis which takes into account: Vintage of outstanding loans Duration of loans by vintage Loan to value ratios by vintage Historic and future changes in collateral values, and Impact of loan extensions
Box 1: Our four-step approach to estimating the net debt funding gap
Since we first released the debt funding gap in March 2010, we have adapted our approach to the changing market conditions and to reflect new and better information. Currently, our analysis involves the following four steps: 1. 2. 3. 4. Estimate the refinancing gap based on refinancing of maturing debt vintages Add the impact of bank regulations to provide the gross debt funding gap Estimate the positive impact of non-bank lending sources Subtract the non-bank debt from the gross gap to estimate the net debt funding gap
In addition across Europe, we have updated our analysis to take account of the regulatory impacts as well as new nonbank lending. We use a four step process in calculating the net debt funding gap (see Box1). Where data permits, inputs vary for each individual country. A detailed step-by-step methodology is available in the 2 appendix of our May 2011 report , and our process of dealing with the regulatory impacts is outlined in our May 3 2012 report .
Although 2012 is now nearly past us, we continue to analyse over the period 2012-13 to enable a like for like comparison of the regulatory impacts. The latest available estimates provided by the International Monetary Fund (IMF) only cover the 4 period to end 2013 . This limits our ability to move forward with an updated 2013-14 estimate at this time.
4
Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, October 2012, IMF
The UK Commercial Property Lending Market Research Findings 2011 Year End, De Montfort University 2 Global Debt Funding Gap, Smaller But Pressures Remain, 5 May 2011 3 Global Debt Funding Gap, new non-bank lending offsets EBA impact, 11 May 2012
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DTZ Insight
Figure 2
160 120
Asia Pacific
-20%
80
Europe
Europe
5 0 May
Source: DTZ Research
Figure 3
50 0
4
Net debt 3 funding gap
Figure 4
20 10
0
May 12
Source: DTZ Research
Nov 12
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DTZ Insight
Step 2: Pending banking regulations more than doubles Europes gap to USD190bn Allowing for the regulatory impact (see Box 2), Europes USD82bn refinancing requirement more than doubles to a USD190bn gross debt funding gap (Figure 5). The UK remains the most exposed, with a gross funding gap of USD36bn, followed by Germany and Spain at USD27bn and France at USD26bn. As we highlighted previously some markets with relatively low refinancing gaps are impacted more by regulation. Of the major markets, the Netherlands is most exposed with its refinancing gap rising from USD0.2bn to a gross debt funding gap of USD9.9bn. Sweden is also exposed with its gap rising from USD0.8bn to a gross USD5.2bn. Ireland remains the only market which is not impacted by the regulation based on our analysis. Of the major markets, Spain only has a 10% hit due to regulation. Of course there are other pressures building on the Spanish banking system (see Box 3 for an update on Spain). Increase of 4% in gross debt funding gap based on regulatory impact The gross debt funding gap has increased in all major markets. Overall, across Europe the gross funding gap has risen 4% from USD182bn in our May-12 estimate to USD190bn now (Figure 6).
Figure 5
200
150
20 10
0
100 50
0
Refinancing gap
Source: DTZ Research
Regulatory impact
Figure 6
May 12
Source: DTZ Research
Nov 12
Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, October 2012, IMF
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Bad bank quick facts Spain Name Established Life span Average haircut on transfer (Range) Public ownership
Source: Bank of Spain, NAMA, Morgan Stanley
Ireland NAMA December 2009 10 years Average 58% (35% - 72%) 100%
Doubtful loans are loans in relation to which there is reasonable doubt regarding full repayment (of principal and interest) in accordance with the contractual terms. See www.bde.es.
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Government-sponsored bad banks address relatively most exposed markets but, whos next? Comparing the gross debt funding gap relative to the size of the individual countries invested stock provides a more realistic measure of their exposure as you might expect to see a high debt funding gap in a relatively larger market. Ireland and Spain remain the most exposed markets with their gross debt funding gaps around 6% of its invested stock (Figure7). As noted above, both countries now have structural solutions in place with government-sponsored bad banks. Hungary and Romania, at around 5% have the next largest relative exposures. A number of major European markets including the UK, Germany, France, Italy and the Netherlands have high relative exposures. This does bear the question, whether any of these countries might be next by putting in place a state-sponsored structural solution, similar to those adopted in Ireland and Spain. These exposures in Europe ignore the impact of swap breakage costs. In some individual cases they can add significant costs, often preventing banks from taking action. We outline the potential costs in Box 4.
Figure 7
Global Gross Debt Funding 2012-13 USD bn, and as % invested stock
7% 6%
NAMA Ireland Hungary Romania Netherlands Italy Germany France UK SAREB Spain
5%
4%
Sweden
3%
Japan
2%
1% 0% 0
Australia
10
20
30
40
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DTZ Insight
Figure 8
Table 2
Notable lending by non bank lenders Lender Aviva Metlife Natixis/ Blackrock LIM M&G L&G
Source: DTZ Research
Location Tower 42, UK Distbn warehouse, UK Portfolio, Germany Grosvenor Square, UK Nido Student housing, UK Student housing, UK
Amount Borrower 145m 133m 388m 100m 266m 121m Nathan Kirsh London & Stamford Edinburgh House Richard Caring Round Hill Unite Group
Figure 9
4Q 12
5 0 2006 2007 2008 2009 2010 2011 2012 2013 < 50m
Source: DTZ Research
50-99m
100-249m
> 250m
Forecast
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DTZ Insight
Figure 10
Combined with the USD75bn of finance from insurance companies and other senior debt funds, this provides additional funding of USD104bn in Europe over 2012-13. Thus shrinking Europes USD190bn gross debt funding gap by 55% to a net USD86bn (Figure 10). The increase in bond issuance is not something we were aware of earlier in the year and therefore has a significant impact on lending capacity, albeit it is unsecured. We also estimate there to be net bond issuance of USD5bn in Japan over 2012-13, which would lower Japans funding gap to a net USD30bn. UK leads the way The main focus of lending activity to date has been predominantly focussed on the UK, although there has been growing activity in Europe. Based on our analysis there is USD9bn of lending capacity focussed on the UK in 2012, with a further USD12bn with a wider European focus. In 2013 we see far more capacity in Europe, with close to USD38bn available and just under USD17bn purely focussed on the UK (Figure 11). As we highlighted earlier, much of the lending activity by non-banks has been in the UK (Table 2). With GBP13bn of debt available from insurers and funds and a net GBP4.5bn in corporate bond issuance to real estate, the UKs net debt funding gap shrinks by 75% to GBP6bn (Figure 12). The UK is therefore leading the way relative to the rest of Europe in shrinking its net debt funding gap. It is therefore of little surprise to see a greater focus of activity towards pan-European funds beyond 2013 (Figure 11) as this is where we see the main challenge going forward. Overall we see further growth in lending capacity, with over USD90bn available by 2015, and a significant USD225bn available over the period 2013-15 (of which 70% is aimed at pan-European funds). This would represent more than 20% of European loans due for refinance in this period.
100 50
0
Bonds
Non-bank 2 finance
Figure 11
2015
Figure 12
2 Non-bank finance
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Insurers to dominate in the near term In the near term we see much of the non-bank activity coming from insurance companies. Many of these companies already have established teams and the capacity to lend in the current market. We estimate insurers to have a two third market share this year (Figure 13). With a growing number of funds now coming to the market, including global equity funds, we can easily see a rapid growth in the number of funds with lending capacity rising nearly seven fold to USD48bn by 2015. This would marginally outweigh the USD43bn we estimate to be available from insurance companies in the same period. In the previous section we highlighted how Europes refinancing gap more than doubled to a gross USD190bn debt funding gap. This pushed the global gross debt funding gap to USD226bn. However funds continue to raise equity to target commercial real estate, whilst we have also see growing interest from non-bank lenders. How does this stack against the gross debt funding gap? Sufficient equity to bridge global funding gap Globally we see sufficient equity to bridge the debt funding gap. In total there is close to USD280bn of equity available which compares with a net debt funding gap of USD117bn (Figure 14). In Asia Pacific the amount of equity (USD70bn) is double the debt funding gap (USD31bn). In Europe there is also sufficient equity (USD116bn) to bridge the net debt funding gap of USD86bn. Diversity in lending sources welcome The current shift towards a more diverse lending base across Europe is a welcome shift in the market. The dominance of banks as a source of finance in Europe is a stark contrast with the US where non-bank lending represents around 40% of the market. With no debt funding gap, this highlights how markets can operate more efficiently when there is less reliance on one source of finance. Rising discounts as loan sales shift to secondary assets Loan sales have continued across Europe, with the focus now shifting from Ireland and the UK to the wider continental European market. Whilst the initial focus of loan sales was predominantly towards performing loans, more recent sales have been of non-performing and more secondary assets. This has led to a rise in the level of discounts which are now ranging from 50%-70%, compared around 25%-30% a year ago (Figure 15).
Figure 13
75%
50%
25%
Insurers
Source: DTZ Research
Funds
Figure 14
Europe
Asia Pacific
North America
Figure 15
10 8
6
40% 20%
0%
4 2
0 Jan 12 Apr 12 Jul 12
Oct 11
Oct 12
Discount
Source: DTZ Research
Trend
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DTZ Insight
As sales have shifted from better performing loans to those loans secured against secondary or poorer performing assets we have continued to see growth in activity, albeit at higher discounts. In recent months we have see a levelling in the rate of discounts applied, which has typically been around 60%. Inevitably there will be instances where pricing becomes an issue as evidence by the failed sale of Project Pivot, a UK non performing loan (NPL) portfolio. Loan sizes too have also been shrinking. Initial sales were often in excess of EUR1bn. More recent sales have been in the region of EUR500m to EUR700m. We see this trend continuing as investors become more selective and the capacity of funds to acquire multi-billion portfolios wanes. Funds not just focussed on core Although many investors are focussed on core opportunities our analysis of newly raised capital across Europe highlights a broad mix of investors active targeting a 7 range of investment styles . The majority of equity raised is through third party managed funds, combined with publicly listed property companies and institutions they form the bulk of raised equity. In contrast to the perception that most funds are seeking prime opportunities, our analysis of funds shows that just 20% are focussed on core, with a majority more interested in opportunistic or value-add (Figure 16). This diversity of styles means funds will be well placed to target the more secondary opportunities coming to the market, although we expect deals to be more protracted as investors focus more on pricing.
7
Regulators to force deleveraging As the crisis across Europe continues we see regulators increasing their focus on the banking sector as well as nonbanks to maintain stability in the financial system. This will force legacy lenders to further deleverage their balance sheets, particularly in more exposed markets, and where significant writedowns are expected. Although in our analysis, the Netherlands has a relatively small funding gap, the exposure towards secondary assets cannot be underestimated. There are plans under consideration that could force banks to revalue the property of standard mortgages to market value if there is an expected impairment on the loan. Such a requirement could be followed by other Central Banks. In the UK uncertainty still remains over the impact of slotting. The lack of transparency over the introduction of slotting means we are unable to assess its impact in our analysis. The introduction could lead to a further reduction in lending capacity and the writedown of legacy loans and would likely lead to an increase in overseas lenders and other non-bank sources of finance. European lending market returns to normal by end-2015 It is now five years since the onset of the financial crisis in 2008. Whilst the deleveraging process was slow to start we have seen the momentum building since 2011. If we see continued strong growth in new non-bank lending, continued low base rates and no further regulatory changes, we expect the European net debt funding gap to have shrunk by more than half (55%) by the end of 2013. In the UK, this will be even stronger falling to 25% of the gross gap. If these trends continue, we project that over the next three years, by year-end 2015 the European debt funding gap will be largely resolved. The majority of the UKs gap will most likely be gone earlier than that. The tail end of the work out, comprising around 10-15% of the funding gap will take a longer period to run-off, and as evidenced in previous cycles.
See DTZ Insight Great Wall of Money New Capital returns to Growth, 9 October 2012
Figure 16
GOEFs SWFs Private Property Co. Institution Publicly listed companies 20%
Value-add
Opportunistic
Fund Style
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DTZ Insight 10
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DTZ Research Contacts
Global Head of Research Hans Vrensen Phone: +44 (0)20 3296 2159 Email: hans.vrensen@dtz.com Global Head of Forecasting Matthew Hall Phone: +44 (0)20 3296 3011 Email: matthew.hall@dtz.com Head of Strategy Research Nigel Almond Phone: +44 (0)20 3296 2328 Email: nigel.almond@dtz.com Head of UK Research Ben Burston Phone: +44 (0)20 3296 2296 Email: ben.burston@dtz.com Head of CEMEA Research Magali Marton Phone: + 33 1 49 64 49 54 Email: magali.marton@dtz.com Head of Greater China Research David Ji Phone: +852 2507 0507 Email: david.yx.ji@dtz.com Head of APAC Research Chor-Hoon Chua Phone: +65 6293 3228 Email: chorhoon.chua@dtz.com Head of Americas Research John Wickes Phone: +1 312 424 8087 Email: john.wickes@na.ugllimited.com
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This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ November 2012
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