European commercial property facing €176bn funding gap

Europe’s commercial property faces a €176bn (£151bn) funding gap between 2024 and 2027, according to CBRE. The firm said a total of €640bn in private real estate debt had originated across Europe between 2019 and 2022. Of this total, €176bn (27.5%) may not be refinanced when the debt matures over the next four years. The estimation is based on CBRE’s analysis of current capital values and borrowing rates. The funding gap is expected to be largest in the office and multi-family sectors. Offices are expected to face an €82bn shortfall, while multi-family faces a gap of €68bn. CBRE said while the shortfall will be spread relatively evenly over the next four years for offices, the debt gap will be felt mostly in 2026 and 2027 for multi-family and logistics. This is a reflection of the record levels of investment in these sectors in 2021 and early 2022. The debt funding gap for retail is smaller but, as a percentage of the debt originated, high street retail has the largest gap at 30%, according to CBRE’s analysis. However, it does not envisage a sudden crisis, pointing out that the extent of the funding gap may be mitigated by lenders and borrowers working together to extend and amend terms as the loans mature. Chris Gow, CBRE’s head of debt and structured finance for Europe, said: “These estimates provide a broad gauge for the scale of the refinancing issue and indicate the sectors and markets facing the largest challenges. In practice, we should recognise that lenders and borrowers have been agreeing loan extensions and amendments to allow more time for the market to stabilise and for funding issues to be resolved in an orderly way.” The gap is expected to close as capital values recover. CBRE is forecasting improved market conditions, which should mitigate some of the funding gap as interest rates begin to fall and values start to recover. Tasos Vezyridis, CBRE’s head of thought leadership for Europe, said: “Capital values are expected to recover and borrowers will once again have access to better financing terms. “Based on our in-house forecasts, the debt funding gap will reduce by €62bn to €114bn during the 2024-2027 period, a reduction of 35%.” He added: “While relief from the funding gap will be limited in the next couple of years, the impact will be markedly less pronounced in 2026 and 2027 based on a forecasted recovery of values and lower interest rates.” Multi-family, office and logistics are expected to see the largest absolute declines in the debt funding gaps due to recovering capital values with reductions of €30bn, €20bn and €11bn, respectively. Retail is expected to see the slowest reduction, which is largely due to a forecast of relatively stable values moving forward. To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews