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Dtz distressed debt report
1. DTZ Insight
Global Debt Funding Gap
New equity to plug into messy workout
24 November 2010 The debt funding gap continues to be the biggest challenge to
many international property markets. The debt funding gap is the
difference between the existing debt balance as it matures over
time and the debt available to replace it. In this updated and
Contents expanded analysis, we incorporate loan maturity extensions.
Introduction 2
Global debt funding gap 3 Over the 2011-13 period, we estimate the global debt funding
New equity sufficient to bridge gap 4 gap to total US$245bn. Europe has the greatest exposure (51%)
Current market status 5 followed by Asia Pacific (29%) and the US (20%).
Market outlook 7
Appendix 9
Relative to their overall market size, many European markets,
such as Ireland, Spain and the UK, have big debt funding gaps.
Authors Japan is the only Asia Pacific market with a significant gap. In
contrast, the US relative funding gap exposure is modest.
Nigel Almond
Forecasting & Strategy Research
+44 (0)20 3296 2328 The global US$245bn debt funding gap can be bridged as there
nigel.almond@dtz.com is US$376bn of equity capital available. But, there are regional
differences, with Europe trailing (Figure 1).
Konstantinos Papadopoulos
Forecasting & Strategy Research Currently, market participants and governments are going
+44 (0)20 3296 2329
through a messy workout in a wide range of different solutions.
kostis.papadopoulos@dtz.com
Banks have moved on from pure extend and pretend to extend
and amend - amending terms, such as margins and cash
trapping. Banks are getting tougher on borrowers, but due to
Contacts swap breakage costs foreclosure is not always feasible.
David Green-Morgan In future, we expect regulators and lenders to take cues from the
Head of Asia Pacific Research US lending markets. The diversity of funding channels in the US
+61 2 8243 9913 highlights the need for more non-bank lenders elsewhere.
david.green-morgan@dtz.com
Longer loan maturities, scheduled amortisation and fixed
Magali Marton (unhedged) rates provide the US with significant advantages.
Head of CEMEA Research
+33 1 49 64 49 54 Figure 1.
magali.marton@dtz.com Debt funding gap and available equity by region, 2011-2013
US$bn US$bn
Tony McGough 400 160
376
Global Head of Forecasting & 145
350 140
Strategy Research 126
300 116 115 120
+44 (0)20 3296 2314
245
tony.mcgough@dtz.com 250 100
200 70 80
Hans Vrensen 150 49 60
Global Head of Research 100 40
+44 (0)20 3296 2159
50 20
hans.vrensen@dtz.com
0 0
Global (LHS) Europe Asia Pacific US
Available equity Debt funding gap
Source: DTZ Research
www.dtz.com 1
2. Global Debt Funding Gap
Section 1: Introduction Changes to methodology
This report provides an update to our previous paper, the Since our previous report there have been a number of
1
European Debt Funding Gap , which we published in changes which have necessitated revisions to our
March this year. We subsequently extended our analysis to approach in this report. Some of this reflects new 2009
2
Asia Pacific in our Money into Property report . In the data for the UK, which was reported in De Montfort
current report we provide an update of our analysis and University’s updated report on the UK lending market.
extend it to include the United States. We have also made These key changes are outlined in Table 1. We discuss
some refinements to our analysis to reflect market changes our methodology in more detail in the Appendix.
and improvements to data.
Table 1
In this research we continue to define the debt funding gap
as the gap between the existing debt balance and the debt Comparison of new data and original analytical inputs
available to replace it. We consider the debt funding gap to New market March 2010
be the biggest challenge to many international property Data
data assumption
markets. It is a relevant issue because a lack of funding at
maturity is the most likely trigger of a loan event of default. Loan Two-thirds of loans maturing in
No extensions
Defaults during the loan term have, and are expected to be, extensions 2009 were extended
limited. Only at loan maturity is the borrower forced to find Extension 2009 extensions were 2.5
n/a
an alternative refinancing source. maturities years on average
Origination Actual LTV of 72% in 2009
This is all the more important when we consider the 60%
LTV was ahead of expectations
amount of outstanding debt to commercial real estate
globally, which we estimate to be US$6.8trillion. The Loan Year end 2009 figure (£50bn)
£17bn*
originations above previous estimates
majority of collateral is located in Europe and the US
(Figure 2). Of this global debt, over a third (US$2.4 trillion) Capital
Incorporate our latest Q3 2010
is due to mature between 2011 and 2013. Many of these value n/a
forecasts
loans were originated or refinanced at the peak of the forecasts
market in 2006/07. This presents a huge challenge to the Source: DTZ Research; De Montfort University
industry following significant falls in values and a tightening * Based on estimated debt available for refinancing only. New loans were excluded.
in lending policies. It also comes at a time when many
banks are seeking to reduce their exposure to real estate, In our previous analysis, we did not make any explicit
in response to regulatory changes like Basel III. assumptions on loan extensions due to the lack of relevant
data. Market intelligence at the time suggested that loans
Figure 2 were extended by a year or less. Recent data highlights
Global outstanding debt to commercial real estate, extensions averaging 2.5 years and in some cases up to 5
2009 years. In our updated methodology we have now explicitly
accounted for the extension of loans in 2009 and assumed
Rest of APAC it to continue into the foreseeable future. In this respect,
Asia Pacific
24% Australia UK we assume a straight line reduction in loan maturity
China
Spain extensions from the two thirds in 2009 to fall to zero in
Europe 2013.
38%
Germany
Japan
The report is structured as follows. In the next section we
France outline the debt funding gap globally. In section 3 we
US$6.8trn
compare this to the available equity. In section 4 we
Rest of Europe discuss where the market is today, concluding in section 5
with our outlook for the market.
US
38%
Source: DTZ Research
1
DTZ Insight, European Debt Funding Gap, 29 March 2010
2
Money into Property, Asia Pacific 2010, 11May 2010
www.dtz.com 2
3. Global Debt Funding Gap
Section 2: Global debt funding gap Apart from Japan, the only other markets in the Asia
Pacific region with any funding gap are Australia
(US$0.5bn) and New Zealand (US$0.1bn).
US$245bn global debt funding gap
Notably, our research does not highlight any debt funding
Over the next three years (2011-2013) we estimate the gap in emerging markets such as China or India which
global debt funding gap to total US$245bn. In absolute have seen a development boom in recent years. This
amounts, Europe has the largest debt funding gap of boom has been partly supported by debt. In fact, China
US$126bn (51%). A further 29% (US$70bn) is in Asia has the second highest level of outstanding debt in the
Pacific with the remaining US$49bn (20%) in the US region after Japan. But, so far these markets have been
(Figure 3). insulated from any significant downturn as capital values
have held up.
Figure 3
Debt funding gap by region, 2011-2013 Ireland most exposed on a relative basis
US$bn Total %
2011-13 Logically, those markets with high levels of outstanding
120 108 245 debt are likely to have high absolute debt funding gaps.
This ignores the relative size of individual markets.
100 18 49 20%
81 Comparing the absolute debt funding gap relative to the
80 70 29% market’s size (measured by its invested stock) shows the
19 30
56 relative exposures of individual markets (Figure 5).
60
12 23
40 Figure 5
18 126 51%
60
20 40 Debt funding gap as a percentage of invested stock
26
% Stock
0
2011 2012 2013 18%
16% Ireland
Europe Asia Pacific US
14%
Source: DTZ Research
12%
10% Hungary
Among individual countries the largest absolute debt
8%
funding gap is in Japan (US$70bn), followed by the UK UK
6% New Zealand Spain
(US$54bn), the US (US$49bn), and Spain (US$33bn). The Romania
Switzerland Japan
remaining markets, including Germany and France, have 4% Portugal
Czech Rep Denmark
absolute debt funding gaps below US$10bn (Figure 4). 2% Poland Italy
Sweden Germany US
France
0% Australia
Figure 4 0 1 10 100
Largest absolute funding gaps by country (2011-13) Absolute debt funding gap US$bn 2011-13 (log scale)
Source: DTZ Research
US$bn
80
70 On this relative basis Ireland is the most exposed market
70
with a debt funding gap over the next three years totalling
60 54 US$6.5bn, equivalent to 16% of its invested stock.
49
50 Hungary also has a high relative debt funding gap of 10%,
40 despite having only a US$2bn absolute debt funding gap.
33
30
Japan, Spain and the UK have high relative debt funding
20
gaps – each at 6% - as well as high absolute debt funding
10 7 6 6 4 4 2 gaps. Despite having one of the highest absolute debt
0 funding gaps, on a relative basis the US is less exposed,
as the debt funding gap represents just 1% of its invested
stock. Both France and Germany also have low relative
debt funding gaps at 1%.
Source: DTZ Research
www.dtz.com 3
4. Global Debt Funding Gap
Unsurprisingly the Asian markets of Australia and New In the rest of Asia, we see loan maturities of five years on
Zealand, which have low absolute debt funding gaps, are average. With more limited capital value falls, values are
also low on a relative basis. They sit alongside some other expected to have returned to the levels at the peak in 2007
European countries, including the Czech Republic, Poland, by 2012. These variations explain the high debt funding
Sweden and Switzerland. gap in Japan relative to the rest of Asia Pacific.
Funding gap driven by loan maturity practices Section 3: New equity sufficient to bridge gap
3
The differences in the debt funding gap between Based on our recently published research we estimate
international markets is not a surprise when considering there to be US$376bn of equity available to be deployed in
lending practices and capital value changes - factors which commercial real estate markets globally over 2011-13. This
drive the size of the debt funding gap. is more than 1.5 times the estimated debt funding gap of
$245bn.
In the US, loan maturities are on average ten years.
Therefore any loans granted at the peak of the market in At a regional level we do see some differences. The
2006/07 will not be due for refinance until 2016 at the amount of new equity targeting Europe (US$145bn) is only
earliest. This provides some insulation to loans granted at just sufficient to cover the estimated debt funding gap of
the peak from the large short term falls in capital values. US$126bn. In the other regions the amount of equity is
The majority of loans due for refinance in 2012 in the US, more than sufficient to cover the debt funding gap. In Asia
will have originated in 2002. By 2012 we estimate their Pacific the amount of available equity is more than 1.5
value will be well above (25% higher) that at the point of times the debt funding gap, and 2.3 times greater in the US
origination (Table 2). Disregarding the further beneficial (Figure 6).
impact of any scheduled amortisation, this timing explains
the modest US debt funding gap. Figure 6
Debt funding gap and available equity, 2011-2013
Table 2
US$bn US$bn
Capital values index pre and post crisis 400 376 160
145
Year US Europe UK Japan Asia 350 140
Pacific 126
(ex UK) 300 116 115 120
(ex Japan) 245
250 100
2002 56 56 74 48 39
200 70 80
2007 100 100 100 100 100 150 60
49
2010 64 81 75 57 95 100 40
2012 70 86 75 58 100 50 20
Source: DTZ Research, IPD, MIT/NCREIF 0 0
Global (LHS) Europe Asia Pacific US
In contrast, we see a different picture in both Europe and Available equity Debt funding gap
Japan. In continental Europe and the UK loan maturities Source: DTZ Research
are traditionally closer to five years. Here loans are more
exposed to the recent value declines. Loans originated in
2007 will be secured by properties with values 14% lower Even when looking at the near term, in 2011, where we
in 2012 across continental Europe. This is even greater in have greater clarity in the numbers, we do not see a
the UK at 25%. These loan maturity and value trends problem, with the available equity (US$125bn) matching
reflect the variations in debt funding gaps across European the debt funding gap of (US$56bn) globally. A similar
markets. picture emerges in each of the regions too. Of course, the
short term extension of loans helps reduce the need for
In Japan, loans are traditionally for a period of three years, financing the debt funding gap in the near term.
providing an even greater exposure. Loans maturing in
2010 are expected to be backed by properties worth 43% But, it is not all positive news. As we highlighted in our
lower than at the peak in 2007. Also, we do not forecast previous study, many of these investors do not have the
any significant appreciation in Japanese capital values by ability to buy loan or partial equity positions. Equally, loan
2012. assets might not be priced to meet the required return
3
DTZ Insight: The Great Wall of Money, 13 October 2010
www.dtz.com 4
5. Global Debt Funding Gap
aspirations of the opportunity fund purchaser in many future uplift in values from a recovery in the markets and
instances. This is particularly the case on loans secured by from active management, rather than potentially having to
secondary properties, where relevant market evidence sell at distressed prices and crystallise any losses at an
remains thin. Banks so far have not marketed loan early stage. On developments that have potential, banks
portfolios backed by these types of properties. But, if are willing to enter into joint ventures with developers to
pricing is sufficiently attractive, we would expect sufficient see schemes through.
investor interest.
Inevitably, we are seeing more foreclosed assets coming
Much of the equity raised has the flexibility to be deployed to the market, notably the UK. In 2009 23 assets were sold
in areas of greatest opportunity. Our research highlighted totalling £1.52bn. In the first three quarters of 2010, the
that 56% of the capital is targeted at multiple markets. number of sales by the administrators has already more
Further, more than two thirds of that targeting single than doubled at 47, representing a further £0.87bn of sales.
countries is focused on the US and UK -- both markets
have high absolute debt funding gaps. This flexibility In cases where all investors’ equity has been wiped out
means investors can focus on opportunities in key markets. following adverse movements in capital values and high
origination LTVs, borrowers lose interest in the property. In
Section 4: Current market status a limited number of cases we have seen borrowers
handing back the keys of the properties to the lender.
Debt solutions come to the fore We also see an increase in the number of loan sales.
Recently there have been a number of loan sales
We are seeing increased activity on the debt side. Having announced by banks seeking to reduce their real estate
put their workout teams in place and reviewed their exposure.
portfolios, banks are now starting to be proactive in
bringing about solutions, especially on more problematic New entrants like debt funds are coming into the lending
loans. market, trying to exploit the gap that has been created by
the subdued new debt issuance. Of course these are few
One way is through consensual sales whereby the bank in number and would only deploy capital if pricing allows
forces a borrower to sell assets to meet their debt them to obtain the returns they seek. Table 3 below
obligations. Failure could result in the bank enforcing on summarises some of the solutions we have recently seen
the collateral. In some cases banks are teaming up with in the market, including new sources of finance.
private equity players to actively manage foreclosed
properties. This enables the banks to share in the potential
Table 3
Notable market deals
Property/ Loan
Parties involved Country Date Solution implemented
Loan name amount
Hammerson, GE Real Refinance of development loan with new
125 Old Broad
Estate, Bank of Ireland/ UK 06/2010 £135m Eurohypo replacing HSH Nordbank and
Street
Eurohypo Hypo Real Estate
Foreclosed bank FDIC sells US commercial loans of failed
FDIC US 07/2010 $1.85bn
assets institutions
Evans Randall/ Pramerica provided mezzanine debt from
Draper’s Gardens UK 09/2010 £150m
Pramerica its European debt platform
Handed back keys to lender after equity
Goldman Sachs Tiffany building Japan 09/2010 ¥30bn
was wiped out
Targetfollow/ Placed into administration after failed
Company loan UK 11/2010 £700m
Lloyds sales and new equity injection
Centro managed In Consensual property sales to meet debt
Centro Australia AUS$3.9bn
funds properties progress repayment
Propinvest/ AIB, In Consensual property sale to meet debt
Citigroup tower UK £875m
Santander, RBS progress repayment
In
RBS Spanish Loans Spain £1,7bn Seeking bids for sale of loan portfolio
progress
Source: DTZ Research
www.dtz.com 5
6. Global Debt Funding Gap
Expected and necessary pressures still absent Governments have also taken stakes in banks to provide
additional stability.
Global property markets have been relatively slow in
adjusting to the funding shortage. The fundamentals The only scheme in Europe with an active management
needed to bridge the debt funding gap seem to exist and mandate is the National Asset Management Agency
equity is more than sufficient to fill the gap. However, (NAMA) in Ireland. The scope of the agency is to buy the
activity has been slow to pick up and the pressures to distressed loans from the country’s banks at a discount,
inject new equity have largely failed to emerge. actively manage them and sell to maximise returns for the
taxpayers. By September 2010 a total of €27bn of assets
There remains a mismatch in pricing between potential had been transferred to NAMA. However, the agency will
sellers and buyers. Sellers are not willing to sell at not hoard assets, nor will it engage in any fire sales. We
significant discounts to par while buyers are not willing to therefore see an orderly disposals process that is likely to
pay the full price, particularly for more secondary assets. start in 2011.
Investors have managed to extend their commitment In the US, Congress created the Federal Deposit
periods and the need to spend capital is not as urgent. On Insurance Corporation (FDIC) to insure the nation’s
the borrowers’ side, the flexibility of banks on minor deposits and provide liquidity to ailing banks. Its purpose is
covenant breaches has not forced borrowers to find a to take over failed institutions and resolve them. This is
solution to the gap, especially since most solutions would achieved usually by selling the deposits and loans of a
require giving up significant share of the collateral to a third failed institution to another institution. The FDIC has been
party. As long as the cost of financing remains low, interest active since the 1930’s and has been involved in a number
payments are covered, and there are unlikely to be any of failed banks loan sales throughout all the turbulent
significant covenant breaches, we do not foresee any periods since then. It has played a major role in the current
pressures for the banks to take action, thus transferring the crisis having sold loans with a total face value of $21bn,
risk to the point of refinance. since May 2008.
The expected removal of state supports which has In Asia Pacific support has been more limited, reflecting
provided banks with necessary liquidity have so far been the low debt funding gap. Nonetheless, the Bank of Japan
slow to unwind. In fact, in the US, we have recently seen a has stated its willingness to support the J-REIT sector to
second round of quantitative easing to provide support to provide confidence to the markets.
the economy. In Europe, policy makers have not dismissed
any further supports. Swap breakage costs additional barrier to
enforcement
These policies have removed a significant amount of
pressure off of banks, allowing them to deal with a number However, a key restricting factor in enforcements is the
of liquidity issues without engaging in any drastic solutions. widespread use of interest rate swaps on many European
The Basel III reserve requirements agreed in September loans. According to De Montfort University’s bank lending
2010 will ultimately lead to more conservative lending survey, 57% of the commercial real estate debt
terms. As these will not take effect until the end of the outstanding in the UK has a swap agreement in place.
decade, they are unlikely to significantly impact current Swaps were originally agreed to mitigate adverse interest
practice. rate movement risk. When a bank calls a loan in default, a
swap breakage fee has to be paid.
Although the pressures to bring equity and debt closer are
not there yet, more recently we have seen more Since the markets peaked interest rates have fallen by
sophisticated solutions emerging. This indicates that approximately 350bps in Europe, 450bps in the US and by
banks and borrowers are becoming more willing to find 550bps in the UK. Given the steepness of this decrease in
ways to bridge the gap. interest rates and the long duration of most of those swaps,
the breakage cost can be significant.
Different state approaches amongst the regions
This has prevented banks from taking necessary action to
We have also seen significant differences in the way mid-term nonperforming loans given the extra cost burden.
different regions have approached the debt funding gap. In In some cases the breakage costs can be as high as 20%
Europe, we have seen a number of government and of the loan amount. On the other hand, holding on to large
central bank support schemes, usually funded by property portfolios is limiting their appetite and capacity to
taxpayers. The majority of these mainly act as insurance in lend in commercial real estate and holds the market to a
the case of losses, to prevent further liquidity shortages. stall.
www.dtz.com 6
7. Global Debt Funding Gap
Moving from extend and pretend to extend and A factor that has placed the US in a relatively better
amend position than Europe is the diversity in funding. Lending is
traditionally split between banking institutions, other
In 2008 when the problems of refinancing loans first lenders including life insurance companies and CMBS. In
emerged, banks would often roll-over these loans for a contrast, around three quarters of the European market is
period of a year. But as the financial crisis continued and dominated by banks, with the remaining quarter split
funding channels for banks remained restricted we have between covered bonds and CMBS. In Asia Pacific lending
seen the continued process of extending loans for an is dominated by banks.
average of two and a half years.
This diversity is helping the US in their way out of the
Recently, we have seen a move from the extension of funding shortage, where we see the beginnings of new
loans to a combined extension and amendment of the issuances of CMBS. Although it is nowhere near the levels
base loan terms and covenants. In some cases the seen over recent years, it is nonetheless an indication of
finance has been provided by the existing lender, but in a life returning to the market, which should support new
growing number of refinancing cases we have seen new funding (Figure 8).
parties come to the fold, in particular German lenders who
have support of the Pfandbrief market. Figure 8
New CMBS issuance, 2008-YTD 2010
Banks are also enforcing full cash trapping. This can affect
a borrowers’ liquidity position significantly as any excess US$bn
revenues from a secured property has to be used for the 14
amortisation of the loan. 12
But, given that in many regions, values are not expected to 10
recover until beyond 2012, we believe the extend and 8
pretend model is not sustainable in the long run.
6
Section 5: Market outlook 4
2
Need for more non-bank lenders 0
US Europe Asia Pacific
Regionally we see differences in the structure of lending 2008 2009 YTD 2010
markets which has implications for the availability of debt
Source: Bank of America Merrill Lynch, CREFC
through different funding channels (Figure 7).
Figure 7 In Europe new CMBS issuance has not shown the long
waited signs of revival yet. Here differences in the structure
Outstanding commercial real estate debt by lender of loans is delaying any recovery. The issuance that we
type, 2009 have seen has been restricted to just a handful of deals
where the underlying tenant covenant has been the driver
100% 2% 4%
rather than the asset.
90% 18% 18%
80% 6% Still the prospects for a real recovery in Europe remain thin.
70% Here, the only alternative to bank lending is through the
24%
60% covered bond market which accounts for 18% of current
50% 96% outstanding debt (Figure 7). However, this is heavily
40% 76% dominated by the German Pfandbrief market, which is the
30% 55% only real source of new lending and refinance in the
20% current market. In its absence, European lending markets
10% would be in an even more perilous position.
0%
US Europe Asia Pacific Lending terms provide immunity
Banks CMBS Insurance cos & other institutions Covered bonds
Further differences among the regions relate to lending
Source: DTZ Research
practice and loan terms. These can provide some immunity
www.dtz.com 7
8. Global Debt Funding Gap
to the debt funding gap in some cases, or restrict solutions Banks have committed to restructure and reduce exposure
in others. in the property sector within a particular timescale. We
therefore expect to see more activity from banks to bring
As we highlighted in section 2, loan length is of great about solutions going forward in an orderly fashion. Every
importance. Longer maturities can protect from the short case is likely to be treated individually. Discussions
term volatility in capital values. As property tends to be between borrowers and banks should begin at the early
cyclical it is likely that values revert to their mean in the stages of the refinancing requirements as trust is essential
long run. The US tends to have longer loan maturities that to an effective and fair solution between the two parties.
have so far been insulated against the recent falls in
values. Although this cannot provide a solution to the Secondary assets most exposed
current debt funding gap, we might see the adoption of
such practice in European and Asia Pacific markets in the The quality of the collateral is also of significant importance,
future, especially as regulatory pressures increase. with secondary properties likely facing a much higher
refinancing risk than the prime ones. This reflects the fact
The high cost of breaking swap contracts has proved to be that values on secondary assets have been more exposed
a significant liquidity barrier. Contracts which are longer in in the current downturn. Peak to trough in the UK, values
length than the underlying loan are most at risk. But these on secondary assets have fallen more than on prime.
are likely to diminish as the swap breakage cost is directly Added to this the value of secondary assets have not
linked to the outstanding length to maturity. An alternative recovered as much as prime, leaving these assets more
solution could be an increased use of fixed rate loans. exposed. Given the risk aversion in the markets, investors
are seeking only prime properties with demand for
Another way to protect against a future debt funding gap is secondary ones remaining very thin. This is clearly evident
the increased use of fully amortising loans. By amortizing when comparing the upper and lower quartile yield
the principal during the loan term, the outstanding balance movement on the IPD UK index. This also indicates that
reduces as loans get closer to maturity, reducing the investors are more likely to enter loan positions backed up
refinance risk. Again such practices are more prevalent in by better quality assets rather than riskier ones.
the US.
Figure 9
Regulatory changes to affect decisions
UK prime v secondary yield movement
Although banks and borrowers have not been forced to %
engage in more dramatic solutions, potential changes 14
might affect their decisions in the short term. Those 12
changes relate to both the equity and the debt side: 10
As governments focus more and more on their 8
sovereign deficits and debt, a potential unwinding of 6
accommodation policies will put weight on banks to 4
deal with their most problematic loan positions.
2
Although the Basel III reserve requirements do not kick 0
in until the end of the decade, they will impose stricter
capital requirements. These also include new
regulations that will discourage banks from securing Prime/secondary spread All Property Prime Equivalent Yield
All Property Secondary Equivalent Yield
funding from the CMBS markets, while encouraging
them to access the covered bond markets. Source: IPD, DTZ Research
Further regulatory reforms, including Solvency II, new For a borrower, a larger fall in value means there is a
rating rules, the EU Alternative Investment Fund greater chance of the equity being wiped out. In such
managers Directive, the Dodd-Frank reform and instances they are unlikely to be willing to put in any capital
Consumer Protection Act present further challenges in expenditure leading to a possible further deterioration in
the years to come. the asset and possibly the income stream. In such cases
banks will be less willing to refinance placing greater
Interest rates are currently at record low levels. Any pressure on the borrower to plug the gap or face
increase will deteriorate the position of the more foreclosure.
struggling borrowers and force them to find a solution.
www.dtz.com 8
9. Global Debt Funding Gap
Appendix: Revised methodology Step 1: Calculate outstanding commercial real estate debt
by origination vintage
Our approach to estimating the debt funding gap is broadly
unchanged on our last report. In Figure 10 we highlight the Our starting point has been to take data for the UK using
six key steps to estimating the debt funding gap based on De Montfort University’s (DMU) lending survey. From the
one single loan. data we know the originations (in bank lending and CMBS)
for each year, and from these we deduct what has matured
Figure 10
before 2010. For the purpose of this analysis we are only
interested in the sum of originations which equate to the
Estimating the debt funding gap outstanding amount as at end 2009 (Figure 11).
US$m
120 Figure 11
b
100 Loan origination profile
d
£bn
80 g
298
e 300
60 17%
a 250
40 14%
f
200
20
26%
0 150
2006 Loan Fall in value Asset value Debt available Funding gap
2006-11 2011 2011 100
26%
c
50
Source: DTZ Research
16%
0
In the above example we calculate the gap for a single x 2009 2008 2007 2006 2005
loan in the UK as follows:
Source: De Montfort University; DTZ Research
a) Loan of £100m granted in 2006.
b) Value of assets financed total £116m, assuming Compared with our previous study the proportion of loans
an LTV of 86% in 2006. originated in 2009 was higher than we previously
c) Loan due to mature in 2011 (five year term). estimated (17%), compared to our previous estimate (6%).
4 With a higher proportion, and hence value, of loans
d) Based on capital value changes from the IPD
index and our forecasts, we estimate that values originating in 2009, our analysis now goes back to 2005,
will have fallen by 32% (£37m) over 2006-2011. rather than 2004.
e) The resulting asset value at 2011 is £79m.
f) In 2011 we estimate that debt of £58m will be We assume that the origination of European and Asian
available for refinance based on a 73% LTV. loans follows the same pattern as the DMU data, and apply
g) The debt funding gap of £42m is the difference these proportions to the total outstanding debt secured
between the value of the original loan (£100m) and against properties in each country taken from our Money
the estimated debt available for refinance (£58m). into Property database, including the UK for consistency,
as at the end of 2009. In this way, we look at the debt
In reality we are dealing with a multitude of loans, underlying the properties in each market, rather than the
originated in different years and of differing maturities. In country in which the loans were originated.
contrast to our previous paper, we also need to account for
a proportion of loans to be extended. The following For example, 26% of the outstanding debt in the UK
describes in more detail how we reached our numbers originated from 2006. We therefore assume 26% of debt
based on the above process, step-by-step. Please note originated in this year, in each country. In this way the
some of the charts relate to a specific country. sum of the originations equals the current outstanding debt.
In the US, we have estimated the loan originations each
year by applying the loan origination profile from the
Mortgage Bankers Association to total loans outstanding in
the US as at the end of 2009. As maturities in the US are
4
We ignore any impacts from depreciation in our analysis.
www.dtz.com 9
10. Global Debt Funding Gap
traditionally longer, averaging around 10 years, we have Figure 13
extended the period we cover in the US to 2001. This way
we capture the majority of maturities over the forecast Maturity profile of loans by origination vintage
period. US$bn
100
Step 2: Estimate refinancing requirements by origination 90
2012
vintage 80 2011
2010
70
The next step is to calculate the refinancing requirements 2009
60
using the loan originations calculated in step 1. The DMU 2008
50
study provides data on the duration of loans by origination
40
vintage in the UK up to 2009. In order to complete the 2007
analysis to 2013, we have made assumptions on the loan 30
duration of loans in 2010-2012 (Figure 12). 20
2006
10
2005
Figure 12 0
2011 2012 2013
Loan duration by origination vintage
Source: DTZ Research
18%
16% 2008, 2009 prev. As outlined in section 1, we also know that some loans are
14% being extended at maturity for an average of two and a half
12% years and varying in length between one and five years.
2010, 2011, 2012 The value of these loans needs to be pushed into future
10%
maturities in order to estimate the amount of debt available.
8%
6% We have assumed that 50% of loans extended are for a
2005, 2006, 2007, 2009 period of two years, 20% for three years and 10% each for
4% 2011, 2012 prev.
a period of one, four and five years. This gives an average
2% extension of two and a half years. In 2009 we know two-
0% thirds of loans were extended. We assume a gradual
1-y 2-y 3-y 4-y 5-y 6-y 7-y 8-y 9-y 10-y reduction in the proportion of extensions to zero in 2013 on
Source: De Montfort University; DTZ Research a straight line basis (Figure 14).
With full data now available for 2009, we can see that the Figure 14
profile of durations in 2009 differs from what we previously
Profile of loan extensions
assumed, i.e. rather than having a higher proportion of
shorter term loans, the profile is actually closer to that seen 100% 60%
in the peak of the market. 90%
50%
80%
As a result, we have also adjusted our future loan 70%
40%
durations to more closely align with what we have seen 60%
historically, rather than the gradual adjustment to this trend 50% 30%
in our previous analysis. Applying these loan durations to 40% 50%
the loan originations we create the future maturity profile 30% 67% 20%
(Figure 13). 50%
20%
33% 20% 10%
10% 17% 10% 10% 10%
We assume the same profile for CMBS and for loans 0% 0%
across Europe and Asia Pacific. In the US we have used 2009 2010 2011 2012 2013 1-y 2-y 3-y 4-y 5-y
data on CMBS loans from Bloomberg to create a loan
duration series to 2006. For future years we have assumed Loans extended Loans matured Extension profile (RHS)
the same profile as for 2006.
Source: De Montfort University, DTZ Research
Allowing for extensions, we see an adjustment to the
maturity profile. This is best shown by taking the example
www.dtz.com 10
11. Global Debt Funding Gap
of the single loan we highlighted at the start of this report. Step 3: Estimate original property values by origination
In this example, the first four steps of the process remain vintage
the same (Figure 15). Thereafter we see some small
changes. Based on historic maximum loan to value ratios (LTVs) at
the all property level from the DMU survey, we can
e) By extending the loan by a period of two years calculate the value of the underlying assets in each year
from 2011 to 2013, we benefit from a further uplift (Figure 17). We have assumed LTVs are similar in most
in capital values. markets in Europe and made assumptions from local
f) In this case values improve by 3% to £82m. offices for markets in the Asia Pacific region. In the US, we
g) With a marginally higher LTV of 75% we can have made adjustments from CMBS loan data from
borrow more (£61m). Bloomberg.
h) The resulting debt funding gap is marginally lower
(-7%) at £39m. Figure 17
Figure 15 Original property values by origination vintage
US$bn LTV %
Estimating the debt funding gap with extensions 200 100%
180 84% 87% 86% 84% 90%
US$m
120 160 72% 72% 73% 74% 75% 80%
b d 140 75% 75% 70%
100 120 70% 60%
65%
e 100 60% 50%
80 h
80 40%
60 30%
60
40 20%
a f 20 10%
40
g 0 0%
20 2005 2006 2007 2008 2009 2010 2011 2012 2013
0 Loan origination Implied equity
2006 Loan Fall in value Asset value Debt Funding gap Max LTV (RHS) Max LTV (March report) (RHS)
2006-11 2013 available 2013 Source: DTZ Research
2013
c
Source: DTZ Research
Step 4: Estimate future property value to be refinanced
The resulting maturity profile is outlined in Figure 16 and Applying capital value changes to each of the assets
clearly shows the shift in maturity to later years. underlying the loans by vintage and the known maturity
profiles we can calculate the future value of the underlying
Figure 16 assets. For the UK we have applied capital value changes
from IPD as this provides a better proxy for the market as a
Maturity profile before and after extensions whole. In continental Europe and Asia Pacific, IPD’s
US$bn
coverage and history is not as extensive, therefore we
120 have derived an All Property series based on our own
2012
prime capital values for each country. For both series we
100 apply our own forecasts, which provide us with the value of
2011
2010 assets to be refinanced in future years.
80 2009
60
2008 In the US we have used a capital value series from the
MIT/ NCREIF transaction index, which provides a better
2007 proxy for the overall market. To this we have applied our
40
own forecasts for prime capital values going forward.
20 2006
2005
0
Before After Before After Before After
extensions extensions extensions extensions extensions extensions
2011 2012 2013
Source: DTZ Research
www.dtz.com 11
12. Global Debt Funding Gap
Step 5: Estimate available debt for future refinancing Step 6: Calculate funding gap between existing debt
based on future LTVs refinancing requirements and debt available
Taking the value of assets for refinance (step 4), and The final step is to calculate the debt funding gap. We do
applying our estimates for LTVs, we can calculate the this for each individual year by deducting the value of debt
value of debt that we estimate to be available (Figure 18). available (step 5) from the value of loans for refinance in
In our previous research we assumed that LTVs had fallen each year (step 2). The sum of all the positive values
to 60% in 2009. From the 2009 DMU survey we know the leaves the total value of equity required – the debt funding
average LTV was in fact higher at 72%. In future years we gap (Figure 19). In this analysis we have used the years
have assumed a gradual recovery to 75% in Europe and 2011-2013 to provide a forward looking view, even though
the US. In Asia Pacific we assume a recovery to 70%. 2010 is a forecast year in our analysis.
Figure 18 Figure 19
Estimating the value of debt available in the UK UK debt funding gap
US$bn LTV US$bn
120 112 76% 120
100 92 100
24
84 75%
80 80
67 68 18
60 74% 60
49 12 107
40 40 87 84
73% 68
61
20 49
20
0 72% 0
2011 2012 2013 2011
2011 20122012 20132013
Value of assets for refinance Debt available max % refinancing LTV (RHS) Refinancing requirements (Step 2) Debt available Debt funding gap
Source: DTZ Research Source: DTZ Research
www.dtz.com 12
