AEW research shows European real estate debt funding gap reduces to €86 billion as refinancing challenges ease
November 09, 2024
AEW, one of the world’s leading real estate investment and asset managers1, today releases its latest research on the European real estate debt markets, including its estimate for the debt funding gap (DFG). It shows that the estimated DFG fell 13% to €86 billion for the period 2025-27 compared to the €99 billion estimated for 2024-26 in its April 2024 mid-year outlook. The DFG represents the shortfall between the original amount of secured debt originated in 2016-23 and the amount available for refinance at the loan maturity in the next three years across 20 countries.
Hans Vrensen, Head of Research & Strategy Europe at AEW, commented: “Our latest and improved estimate of €86 billion for the European real estate debt funding gap confirms that refinancing challenges remain. However, the challenge is easing, in part helped by central bank rate cuts which have pushed down bond yields, swap rates and ultimately borrowing costs. As property yields have widened over the last two years, lower borrowing costs now make debt accretive for equity investors again. This should both help bring liquidity back to the investment market and allow collateral values on legacy loans to further recover – further easing refinancing challenges.”
Borrowing terms improve as the European refinancing challenges ease
While margins and all-in borrowing costs have declined, loan margins across sectors have diverged, with office loan margins continuing to widen and logistics and residential loan margins having tightened. There are also initial indications that LTVs are moving back up and financial covenants are becoming less restrictive as lenders look to increase activity and compete on pricing and other terms. Despite these improved terms for CRE borrowers, refinancing challenges remain for many legacy loans due to the historical reduction in their collateral values.
AEW’s latest DFG estimate at €86 billion implies that nearly 13% of maturing European real estate loans in 2025-27, will face a refinancing challenge. This is down from 17% (for 2024-26) as estimated in April 2024 and reflects an easing of conditions across Europe and new, more precise data on loan maturities, loan to value ratios at origination and loan maturity extensions.
Germany and France still face a greater refinancing challenge at an estimated 19% and 18% of all 2016-23 loan originations respectively, the highest share of loans affected across all 20 countries. The UK remains at the lower end at 6%, whilst Italy and Spain are just below the 13% European average at 12%. In addition, the research notes that, apart from equity injections, debt-on-debt has also been used more widely to bridge the DFG. There is also evidence of US banks and opportunistic funds starting to provide unsecured debt financing to non-bank lenders willing to refinance maturing legacy loans with high LTVs.
Not all loans facing a refinancing challenge are expected to trigger a default or loss for the lender. The impact on various sectors depends on the precise timing, extent of collateral and rate distress for each country across each of the 2016-23 loan vintages.
European CRE loan loss estimates below actual CMBS GFC losses
Based on AEW’s analysis, 7.1% of the €700 billion of CRE loan originations in 2016-23 are estimated to be at risk of default compared to 7.5% in February 2024. The associated losses of these loans are projected at 1.8% (down from an estimate of 2.5% in April 2024). These latest projections are also below the 2.3% actual reported historical European CMBS-backed commercial mortgage loan losses triggered during the global financial crisis (GFC).
Examining the different sectors, estimated losses for retail-backed loans in the 2016-23 vintages across the sector are near 6%, more than three times the overall average across all sectors, triggered by more significant and earlier collateral value declines since 2018. Office-backed loan losses are projected at 1.7%, just below the overall average, with all other sectors estimated losses below 1.0%.
NPL ratio of CRE loans across European banks edging up from low levels
Year-end 2023 European Banking Agency data is mixed on lenders’ ability to absorb potential losses. On the positive side, this data shows that only 11% of EU 27 CRE bank loans are in the +100% LTV category. It is worth noting that European banks are better capitalised and regulated than pre-GFC. European banks’ NPL ratio for CRE loans has been trending downwards from over 8% in 2020 to 4% in early 2023 as a result of write-downs and sales of GFC legacy NPL loans. However, in Q4 2023 the NPL ratio edged up to 4.5% due to the falling collateral valuations following the rise in interest rates, partly explained by the increase in the NPL ratios of loans secured by US CRE. European banks’ low CRE NPL and high coverage ratios are in turn starting to result in more attractive loan terms for borrowers, which is expected to facilitate the emerging rebound in European capital values and transaction volumes.