Irish property funding gap is the biggest in Europe
IRISH property owners will face the biggest gap in Europe between the money available and the money needed to refinance their commercial property borrowing over the next two years, according to a new report by London-based DTZ Holdings.
Lenders everywhere in Europe are making far fewer loans than the market wants, pending more shake-outs in their mortgage books, even as calm returns to commercial real estate pricing across the Continent.
The gap between how much money is available to refinance borrowing and the actual amount of borrowing is "disturbingly high" in Ireland, DTZ added.
In terms of relative exposures to property invested, the report estimates Ireland has Europe's largest debt funding gap, at 10pc, compared with 7pc and 8pc in the UK and Spain respectively.
In contrast, Germany and France have more modest relative debt funding gaps at 2pc and 3pc. The UK and Spain make up more than half of the borrowing requirement.
European lenders are grappling with the legacy of €1.8 trillion of loans given to buyers of stores, offices and warehouses in the five-year real estate boom that ended in mid- 2007.
Many were granted near the market's peak at more than 80pc of building values. Prices then sunk by about 26pc across continental Europe and 44pc in the UK leaving many borrowers owing more than the value of the buildings.
DTZ said both lenders and property owners were slowly becoming more incentivised to resolve a stand-off over pricing as resistance to bank 'extend and pretend' strategies grows and smaller lenders move to sell unwanted loan stock before bigger banks come to market.
The shortfall "is the biggest short-term challenge to the European property markets," said Nigel Almond, the study's co- author. "As many loans reach their maturity in the next few years, we expect defaults to become more likely."
In countries with high relative funding gaps, such as Ireland, the UK and Spain, DTZ expects large-scale structural solutions. The group also expects investors from countries such as Germany to flock to countries such as Ireland "overtime" to snap up bargains.
Lenders have so far been able to maintain most of their problem loans due to central bank support.
That includes asset-protection measures that allowed them to extend loans and ignore most defaults or breaches of borrowing terms. That will change because some of those policies are set to be reversed, DTZ said.
"European banks have not wanted to, and have not been forced to, sell loan books at distressed prices," Mr Almond said. "Changes are at hand where both banks and equity investors will come under increased pressure to more urgently find effective solutions."