Market updates and sector developments

Updated AEW research shows an estimated European commercial real estate debt funding gap (DFG) of €93bn, representing the shortfall between the original amount of secured CRE debt originated in 2018-2021 and the amount available for refinance at loan maturity for the 2023-2026 period across all four property sectors in France, Germany, Italy, Netherlands, Spain and the UK (SCI 31 January). France has the largest DFG at €19bn, representing 30% of all loan originations - well above the six-country average of 21%.

“For the first time, we analyse the DFG as a percentage of total loan originations, ranking each country on a relative basis. Surprisingly, Italy and the UK come out below average, while France has the largest DFG at an estimated €19bn,” notes Hans Vrensen, md, head of research & strategy Europe at AEW.

Regarding overall leverage levels, debt financing used to fund new acquisitions reduced by 16% from 2021 to €142bn in 2022, due to the increases in all-in interest rates, which started to negatively impact demand for debt. As a result, market-wide acquisition LTVs reduced to 47% from 50% in 2021, with AEW expecting a further reduction based on lower investment volumes in 2023.

All-in borrowing costs reached a new 20-year record high in European real estate, more than doubling in 18 months to 5.9%, as at mid-year 2023. Sterling-based borrowers still face elevated debt costs at 6.8% today.

Nevertheless, AEW’s in-house data on market level loan costs suggests that all-in borrowing costs have started to stabilise, following successive rate hikes by the ECB and Bank of England, which have started to bring down inflation. Although the firm expects LTVs to stabilise at 50% by the end of 2023, declining collateral values and lower LTVs - amplified by the higher interest rate environment - are likely to trigger significant refinancing challenges for existing legacy loans with LTV and ICR/DSCR covenants at loan maturity in 2023-2025. This should be bridged by a combination of new equity top-ups, senior loan extensions and restructurings and junior debt insertions.

Overall, assuming defaults for any vintage segment with an LTV at refi of above 75%, AEW estimates that 5.8% of total CRE loans originated in 2018-2021 will default at maturity - with expected losses at 2.2% of the principal loan amount after adjusting for enforcement costs, in line with historical post-GFC European CMBS losses. Losses are concentrated in loans with retail collateral.

In other news…

FSB to review post-crisis securitisation reforms

The Financial Stability Board (FSB) has launched a study into the effects of securitisation reforms introduced in the wake of the global financial crisis. The international advisory body is gathering stakeholder views on the extent to which the reforms are achieving their intended objectives; on which specific reforms are having the greatest impact on originators, sponsors and investors; and on the overall impact of reforms on the “functioning and structure” of securitisation markets.

The securitisation reforms were introduced to address what the FSB describes as “information asymmetries and incentive problems” associated with securitisation markets. They focus on capital requirements, retention requirements, enhanced ratings and improvements in disclosure and standardisation.

VW launches green finance framework to boost BEV funding

Volkswagen Financial Services has published a green financing framework to support its sustainability strategy, expand its investor base and raise funds for battery-electric vehicles (BEVs). The new framework covers all refinancing products including ABS, traditional bonds, credit lines, commercial paper and promissory note loans. 

The automaker’s financial services division says funds generated under the framework are to be used “exclusively to refinance credit and leasing contracts” for BEVs. “The first Green Finance Framework from VW FS enables us to place sustainable refinancing instruments on the capital market,” says cfo Frank Fiedler. “This means that the theme of sustainability, as a core element of our Mobility2030 strategy, is also being given appropriate weight in our strategic refinancing mix.”

Bain basks in late-summer Sunshine Leases deal

Bain Capital has acquired Piraeus Bank’s financial leasing subsidiary Sunshine Lease, marking its fifth large-scale acquisition of non-performing loan portfolios in Greece. Sunshine’s portfolio has a gross book value of around €500m and is primarily secured against commercial real estate and hotel assets.