Europe has an insurmountable €1trn of property loans maturing by 2015

Europe’s overleveraged real estate market is at the beginning of a colossal four-year refinancing challenge in which more than €1trn worth of property loans will mature, according to DTZ Research, which it estimates reflects around 55% of the total European outstanding real estate debt.

Over the four years between 2012 and 2015, DTZ Research estimates that €1.02trn worth of European real estate loans will fall due, comprised of €230bn this year; €250bn next year; €269bn in 2014; and €268bn in 2015.

The gap between maturing loans and required new finance is difficult to determine because there is no accurate foresight as to the number of loans which will be extended in any given year.

Furthermore, asset disposals ahead of loan maturities, to both leveraged and non-leveraged buyers as well as restructurings will lead to case-by-case deleveraging by real estate owners.

DTZ’s “funding gap” research is the best estimate of the gargantuan refinancing challenge, with its latest bi-annual findings due out in November, which now estimates a funding gap over a two-year period.

European bank deleveraging is estimated to lead to €231bn of stock coming to the market over the next five years, according to JPMorgan, as part of a wider €413bn offloading over the same period.

Traditional bank lenders are lending less and less every year, driven by legacy deleveraging needs, a more onerous regulatory environment which is requiring banks to hold more in reserve against lent capital, banks’ rising funding costs as well as, of course, a growth-less macro-economic outlook and Europe’s sovereign debt crisis and the potential for a break-up of the Eurozone.

Insurance companies’ property lending, who benefit from more favourable capital adequacy treatment for their loan exposure under Solvency II, remains modest relative to the size of the funding gap.

AXA Real Estate is currently the largest single insurance lender to European real estate, on track to lend more than €2bn in 2012, including the purchase of a reduced €800m pool of performing French and German real estate loans from Société Générale.

But even this is a fraction relative to the annual lending and refinancing of the major banks, such as Deutsche Pfandbriefbank, which last year lent €6.3bn against “core” European real estate markets – and is expected to lend a similar amount this year.

Nigel Almond, head of strategy, research at DTZ, said: “A gradual shift towards more non-banks lenders in the market is welcome in both providing much needed additional lending capacity, but will also provide greater stability and diversity to Europe’s lending market in the longer term.”

There is a feeling among those banks actively lending in “core” European markets – which are considered to be the UK, Germany, France, the Netherlands, Poland and the Nordic markets – that margins on real estate loans are yet to peak.

Average margins mask a more than 100-plus basis points spread between lenders’ term sheet pricing for prime and good secondary property, at between 225 to 350 basis points, while the spread variation for distressed secondary widens even further.

Beyond the fundamentals which drive loan margins – asset, borrower and tenant quality, property location, lease profile, LTV and, of course, amortisation schedule – many of the markets’ most active lenders are turning down deals on the belief that there remains a disconnect  between their own assessment of value, and those of some professional valuers.

Lenders’ disagreeing with valuations is, of course, nothing new but the extent to which loans are rejected as a result is increasingly significant.

Valuation disconnect is one of three “obvious reasons” commonly cited by lenders who reject to offer a term sheet.

The second is banks’ bearish take on prospects in occupier markets, premised on the near-universal agreement that economic growth is not around the corner. And the third is borrower quality – lenders often like the asset, are happy to lend against it in principle, but don’t like the borrower or its investment plan.

Anecdotal perhaps, but one lender said these three factors account for why 95% of deals are quickly rejected.

From banks’ point of view, there is still plenty of risk out there. Lenders’ selectiveness, in part at least, reflects this feeling. No-one has any clear idea as to what the markets will look like in five years’ time, from a macro-economic, regulatory and a property fundamental perspective.

These variables affect financing markets enormously as a result, and with it the probability of lenders’ return of capital.

The clear majority of deals which close are, naturally, refinancing, because the majority of stock is not changing hands – transactional activity in every market remains significantly below the debt maturity profile.

In the UK, Bank of England’s own statistics for net new lending to property revealed a fourth-consecutive quarter over the three months to the end of June – falling by £1.2bn in the quarter and by £12bn over the 12-month period to £175bn.

jwallace@costar.co.uk