Ireland, UK and Spain face biggest commercial property shortfalls

About €480 billion of property loans will mature by the end of 2011, according to research by the London based broker DTZ.

It warns that banks won’t be able to refinance all of the debt, particularly when loans exceed the value of the properties backing them. Lenders are originating far fewer loans than the market wants, pending more shake-outs in their mortgage books, even as calm returns to commercial real estate pricing across Europe, it also says.

Larger markets with higher absolute levels of outstanding debt have higher funding gaps than smaller markets. More than half, 56%, of the shortfall will occur in the UK and Spain, while France, Germany, Italy and Ireland account for afurther 28%, its report says.

And in terms of relative exposures to overall stock invested, the report estimated Ireland has Europe’s largest debt funding gap, at 10%, compared with 7% and 8% in the UK and Spain respectively. In contrast, Germany and France have more modest relative debt funding gaps at 2 and 3% respectively.

Based on a separate analysis, DTZ estimates there to be €58 billion of equity available to target direct real estate investment in Europe in each of the next two years.

It says that this €116 billion war chest is sufficient to finance the European debt funding gap, but many opportunity driven debt investors can only meet high total return requirements if banks sell loans at significant discounts to par.

"There have been a number of obstacles, both on the equity as well as the debt side, that have so far prevented the effective matching up of the available new equity to finance the debt funding gap,” said co-author Kostis Papadopoulos.

DTZ said both parties were slowly becoming more incentivised to resolve a stand-off over pricing as resistance to bank ‘extend and pretend’ strategies grows and smaller lenders move to sell unwanted loan stock before bigger banks come to market.

"On the equity side, we see pressures from the limited commitment periods and possible further downside in the letting markets. On the debt side, we expect policy unwinds, reserve requirements and continuing problems with wholesale funding markets to motivate sales,” said co-author Nigel Almond.

Cash-rich investors had been expecting a wave of opportunities to acquire property as distressed assets from banks, but so far this has not materialised. Banks, including those in the UK, have been reluctant to crystallise losses by disposing of assets at knock-down prices, so have been exploring ways to manage assets back to health.