DTZ Net Debt Funding Gap Nov 12

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<p>DTZ Insight Net Debt Funding Gap European gap to be bridged by 2015, with UK ahead</p> <p>14 November 2012 ContentsIntroduction Net Debt Funding Gap declines Non-bank lending steps-up DTZ Contacts 2 3 7 12</p> <p> The UK posted a 55% reduction in its net debt funding gap over the last six</p> <p>months. This is well ahead of Europe as a whole which posted a 20% decline and the global gap down 17% over the same period. Europe continues to have the highest gap at USD86bn, with the remaining USD31bn in Asia Pacific. As before, we estimate there to be no funding gap in the Americas (Figure 1). In our four step analysis, the net decline occurred despite the negative impact</p> <p>of new banking regulations. These regulations are estimated to more than double Europes refinancing gap of USD82bn to a gross debt funding gap of USD190bn. France, Germany and the Netherlands are most significantly impacted by these pending regulatory pressures. A dramatic 45% increase in new non-bank lending reverses this regulatory</p> <p>impact. Over the last six months, we note an increase as well as greater diversity in new non-bank funding. We are now aware of over ten insurance companies and over 30 funds providing debt financing. As before, we expect these groups to provide USD75bn of additional lending capacity over 2012-13. In addition, we estimate that continued growth in corporate bond issuance could provide an additional USD29bn of net new funding. In the near term, we expect two thirds of the non-bank activity to come from</p> <p>insurance companies. But, the growth in fund raising by fund managers should see a more even balance in lending capacity by 2015. In aggregate we forecast USD225bn of new lending capacity from insurers and funds over 2013-15. With the European net funding gap having shrunk by more than half by the end of 2013, we project that by the end of 2015 a majority of the work-out will have been completed. In the UK this could be earlier. We expect the tail end of the work out to take longer to complete representing 10-15% of the funding gap. This is on the assumption of available non-bank lending, continued low base rates and no further regulatory changes.Figure 1</p> <p>AuthorNigel Almond Head of Strategy Research +44 (0)20 3296 2328 nigel.almond@dtz.com</p> <p>Global net debt funding gap, 2012-13, USD bn2520 15 10-55% -17% Asia Pacific</p> <p>160 120Asia Pacific</p> <p>ContactHans Vrensen Global Head of Research +44 (0)20 3296 2159 hans.vrensen@dtz.com</p> <p>-20%</p> <p>80EuropeEurope</p> <p>5 0 May Nov May Nov May Nov UK (LHS) UKSource: DTZ Research</p> <p>40 0 EuropeGlobal Global</p> <p>DTZ Research</p> <p>Net Debt Funding Gap</p> <p>IntroductionThis is the fifth issue of our Global Debt Funding Gap report and provides an update on our previous analysis released in May 2012. Compared to our previous report, the amount of debt outstanding in each market remains unchanged, based upon data from our Money into Property database at the end of 2011. Since our last report we have made adjustments to some of the inputs based on discussions with our research and deal teams locally and also updated information provided in the year-end 2011 De Montfort University survey on UK 1 commercial property lending . Our methodology for estimating the debt funding gap remains unchanged. As before, it involves a detailed analysis which takes into account: Vintage of outstanding loans Duration of loans by vintage Loan to value ratios by vintage Historic and future changes in collateral values, and Impact of loan extensions</p> <p>Box 1: Our four-step approach to estimating the net debt funding gapSince we first released the debt funding gap in March 2010, we have adapted our approach to the changing market conditions and to reflect new and better information. Currently, our analysis involves the following four steps: 1. 2. 3. 4. Estimate the refinancing gap based on refinancing of maturing debt vintages Add the impact of bank regulations to provide the gross debt funding gap Estimate the positive impact of non-bank lending sources Subtract the non-bank debt from the gross gap to estimate the net debt funding gap</p> <p>In addition across Europe, we have updated our analysis to take account of the regulatory impacts as well as new nonbank lending. We use a four step process in calculating the net debt funding gap (see Box1). Where data permits, inputs vary for each individual country. A detailed step-by-step methodology is available in the 2 appendix of our May 2011 report , and our process of dealing with the regulatory impacts is outlined in our May 3 2012 report .</p> <p>Although 2012 is now nearly past us, we continue to analyse over the period 2012-13 to enable a like for like comparison of the regulatory impacts. The latest available estimates provided by the International Monetary Fund (IMF) only cover the 4 period to end 2013 . This limits our ability to move forward with an updated 2013-14 estimate at this time.4</p> <p>Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, October 2012, IMF</p> <p>1</p> <p>The UK Commercial Property Lending Market Research Findings 2011 Year End, De Montfort University 2 Global Debt Funding Gap, Smaller But Pressures Remain, 5 May 2011 3 Global Debt Funding Gap, new non-bank lending offsets EBA impact, 11 May 2012</p> <p>www.dtz.com</p> <p>DTZ Insight</p> <p>2</p> <p>Net Debt Funding Gap</p> <p>Net Debt Funding Gap declinesUKs 55% reduction leads 20% European decline The UKs 55% reduction leads a 20% decline in Europes total net debt funding gap over the last six months. The global net debt funding gap shrank a more modest 17% to USD117bn over the same period. Europe continues to have the highest gap at USD86bn, with the remaining USD31bn is in Asia Pacific. As before, we estimate there to be no funding gap in the Americas (Figure 2). Four-step approach considers all relevant perspectives In estimating the net debt funding gap, we run our analysis through the following four step process. First we estimate the refinancing gap. This estimate uses a detailed vintagebased refinancing analysis considering maturing debt and new debt available to replace it. Second we add the impact of pending bank regulation to estimate the gross debt funding gap. Third, we estimate the amount of non-bank finance available. Finally in the fourth step, we subtract the new non-bank lending to obtain the net debt funding gap. Please refer to Figure 3 Step 1: Deteriorating capital value outlook pushes refinancing gap higher Globally the refinancing gap has increased by 9% to USD118bn over the period 2012-13. The majority of this increase was in Europe as the refinancing gap grew 7% from USD74bn to USD82bn. The refinancing gap in Asia Pacific grew 2% to USD34bn. There remains no gap in North America. Globally, Japan has the largest refinancing gap at USD35bn. This is followed by the UK and Spain, both at USD25bn. Ireland has the next largest refinancing gap at USD9bn with Italy at USD8bn. France and Germany have gaps of just USD3bn each (Figure 4). Both the UK and Spain saw increases in their refinancing gap. This partly relates to a reduction in the LTV at refinance, compared to our previous assumption. But, this is also driven by a deterioration in the outlook for capital values. This is particularly the case in Spain, whose refinancing gap grew by over USD6bn. Italy also saw its gap grow by over USD2bn, again reflecting a deterioration in the outlook for capital values.</p> <p>Figure 2</p> <p>Global net debt funding gap, 2012-13 USD bn2520 15 10-55% -17% Asia Pacific</p> <p>160 120Asia Pacific</p> <p>-20%</p> <p>80EuropeEurope</p> <p>5 0 MaySource: DTZ Research</p> <p>40 0 Nov May Nov May Nov UK (LHS) UK EuropeGlobal Global</p> <p>Figure 3</p> <p>Four-step approach to estimating net debt funding gap200 150100</p> <p>2</p> <p>3</p> <p>50 0</p> <p>1 Gross 1 debt funding gap Non-bank 2 finance</p> <p>4Net debt 3 funding gap</p> <p>Source: DTZ Research</p> <p>Figure 4</p> <p>Step 1:Refinancing gap by country 2012-13 USD bn4030</p> <p>20 100</p> <p>May 12Source: DTZ Research</p> <p>Nov 12</p> <p>www.dtz.com</p> <p>DTZ Insight</p> <p>3</p> <p>Net Debt Funding Gap</p> <p>Step 2: Pending banking regulations more than doubles Europes gap to USD190bn Allowing for the regulatory impact (see Box 2), Europes USD82bn refinancing requirement more than doubles to a USD190bn gross debt funding gap (Figure 5). The UK remains the most exposed, with a gross funding gap of USD36bn, followed by Germany and Spain at USD27bn and France at USD26bn. As we highlighted previously some markets with relatively low refinancing gaps are impacted more by regulation. Of the major markets, the Netherlands is most exposed with its refinancing gap rising from USD0.2bn to a gross debt funding gap of USD9.9bn. Sweden is also exposed with its gap rising from USD0.8bn to a gross USD5.2bn. Ireland remains the only market which is not impacted by the regulation based on our analysis. Of the major markets, Spain only has a 10% hit due to regulation. Of course there are other pressures building on the Spanish banking system (see Box 3 for an update on Spain). Increase of 4% in gross debt funding gap based on regulatory impact The gross debt funding gap has increased in all major markets. Overall, across Europe the gross funding gap has risen 4% from USD182bn in our May-12 estimate to USD190bn now (Figure 6).</p> <p>Figure 5</p> <p>Step 2:European Gross Debt Funding Gap, 2012-13, USD bn4030</p> <p>200150</p> <p>20 100</p> <p>100 500</p> <p>Refinancing gapSource: DTZ Research</p> <p>Regulatory impact</p> <p>Figure 6</p> <p>European Gross Debt Funding Gap, 2012-13, USD bn40 30 2010</p> <p>200 150 10050</p> <p>0</p> <p>0</p> <p>May 12Source: DTZ Research</p> <p>Nov 12</p> <p>Box 2: Assessing the regulatory impactWe have updated our analysis to take into account the growing impact of the regulatory burden on banks deleveraging requirements. This particularly impacts European banks where the European Banking Authority (EBA) is requiring banks under its watch to maintain a Core Tier 1 ratio of 9%. In our May-12 update we assessed the impact of regulation based on analysis undertaken by the IMF. Since their report was published, the EBA provided some updated analysis highlighting those banks had met the capital ratio requirements, with much of this achieved through capital raisings. Going forward banks will still need to maintain their capital ratios. In the most recent update to their analysis the 5 IMF has revised its estimates on bank deleveraging required to maintain capital ratios. Given the deteriorating economic outlook the amount of deleveraging required has increased from 7% to 7.3%. In line with our previous report we assume commercial real estate takes a similar hit. Whilst the refinancing gap is ultimately the additional equity a borrower needs to find, the regulatory impact is the reduction in equity that hits the bank directly and could come through additional repayment of loans, equity raising or writedowns.5</p> <p>Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, October 2012, IMF</p> <p>www.dtz.com</p> <p>DTZ Insight</p> <p>4</p> <p>Net Debt Funding Gap</p> <p>Box 3: Creating Spains bad bankWith over EUR270bn in outstanding debt to commercial real estate Spain has the third highest level of outstanding debt in Europe. It represents a significant 25% of GDP, the second highest ratio in Europe after 6 Ireland. Official figures from the Bank of Spain show that 27% of loans to real estate are doubtful . Whereas Ireland was quick to establish its bad bank the National Asset Management Agency (NAMA) to work out the problem loans, Spain has been slow to respond, preferring to provide support to the banking system through its Fund for Orderly Bank Restructuring (FROB). Legacy loans to commercial real estate continue to weigh on the banking sector, with the Spanish central bank earlier this year requiring banks to make EUR50bn of provisions to help clear up their balance sheets and the financial system. As part of the process to provide financial support to the banking sector through funds provided by the ECB and IMF a number of banks have been subjected to detailed stress tests. Tests were conducted on fourteen bank groups, representing 90% of total domestic credit in the Spanish financial system. These tests showed there was EUR227bn of loans outstanding to real estate developers with a further EUR88bn of foreclosed loans (mostly in the real estate sector). Following the recent stress test the Spanish Government is also pressing ahead with plans for a Spanish bad bank. The asset management company (SAREB) is currently being established through law and based on the current draft legislation is likely to have a life span of 15 years, with average discounts on loan transfers of circa 50%, ranging from 32% on performing loans to 80% foreclosed land. Although this average reduction appears lower compared to the 58% cut applied to transfers into NAMA, it should be noted that these transfers took place three years ago, and therefore there have already been writedowns and provisions on some of these loans. The move is welcome, and the longer lifespan of the company should prevent fire sales and provide sufficient time to run down the assets. This is critical given the Spanish economy is currently projected to show positive growth in 2014 at the earliest, and growth will only average just above 1% pa from 2012-2021.Table 1</p> <p>Bad bank quick facts Spain Name Established Life span Average haircut on transfer (Range) Public ownershipSource: Bank of Spain, NAMA, Morgan Stanley</p> <p>Ireland NAMA December 2009 10 years Average 58% (35% - 72%) 100%</p> <p>SAREB December 2012 15 years Average 50% (32% - 80%) 250m</p> <p>Forecast</p> <p>www.dtz.com</p> <p>DTZ Insight</p> <p>7</p> <p>Net Debt Funding Gap</p> <p>Figure 10</p> <p>Combined with the USD75bn of finance from insurance companies and other senior debt funds, this provides additional funding of USD104bn in Europe over 2012-13. Thus shrinking Europes USD190bn gross debt funding gap by 55% to a net USD86bn (Figure 10). The increase in bond issuance is not something we were aware of earlier in the year and therefore has a significant impact on lending capacity, albeit it is unsecured. We also estimate there to be net bond issuance of USD5bn in Japan over 2012-13, which would lower Japans funding gap to a net USD30bn. UK leads the way The main focus of lending activity to date has been predominantly focussed on the UK, although there has been growing activity in Europe. Based on our analysis there is USD9bn of lending capacity focussed on the UK in 2012, with a further USD12bn with a wider European focus. In 2013 we see far more capacity in Europe, with close to USD38bn available and just under USD17bn purely focussed on the UK (Figure 11). As we highlighted earlier, much of the lending activity by non-banks has been in the UK (Table 2). With GBP13bn of debt available from insurers and funds and a net GBP4.5bn in corporate bond issuance to real estate, the UKs net debt funding gap shrinks by 75% to GBP6bn (Figure 12). The UK is therefore leading the way relative to the...</p>