Falling commercial property prices across Europe have created a €51 billion funding shortfall, according to new research by AEW Europe.
The study, first reported by Bloomberg, looks at the debt funding gap (DFG), by analysing price changes as well as the impact from higher rates on interest coverage ratios.
In the first instance, AEW’s LTV-related DFG is estimated at €32bn based on its latest forecasts. This is driven mostly by lower value projections impacting 11 of 12 covered property sectors across three countries compared to only six based in its previous projections.
The second factor is the concern over upcoming refinancings due to interest rate rises across Europe.
For the time being it appears that the days of rising real estate values across the continent are over. In a separate report at the end of last year the latest Weil European Distress Index highlights the fact that real estate companies across Europe have seen levels of distress rise significantly on last year and on the previous quarter.
Distress has been pushed higher by increased risk metrics, weaker valuations and lower levels of liquidity, amid an outlook of rising interest rates and lower expectations of capital appreciation.
“Lenders won’t have the luxury of low rates allowing them to extend and pretend like in the aftermath of the GFC [global financial crisis]. They will have to be more proactive about restructuring loans. This means that the cyclical adjustment throughout the business might well be quicker this time around,” Hans Vrensen, head of research and strategy at AEW Europe, said in an interview with Bloomberg.