The global debt funding gap is estimated to total US$142bn over the next three years (2012-2014) according to latest research from DTZ. This represents a 27% reduction on the US$196bn estimated in May 2011, and half the level reported a year ago. The latest ‘Global Debt Funding Gap’ report shows that despite the overall reduction in the global figure there are significant variations at a regional level.
When comparing our previous analysis in May 2011, we can see that the outlook in Asia Pacific has improved dramatically, with the debt funding gap reducing 74% to US$21bn. All of this improvement came from Japan. In particular, loan maturity extension and increased amortisation of loans has helped reduce its debt funding gap.
Anshul Jain, CEO- DTZ, India comments, “The debt levels with Indian real estate developers remain high even though it has come down since the peak levels in 2009-10. Currently, the overhang from the unfavourable macroeconomic conditions including the persistently high inflation, the high interest rates put in place to tame the inflation apart from the high levels of crude rates; commodity prices and the weakening Indian Rupee remain a concern among others.
The numbers paint a bleak picture. As of end of June 2011, the builders owe approximately USD 24 bn which has gone up by 23% from a year ago. At an overall level, profits of listed firms fell by 19.5%. Even PE players are shying away from the sector. USD 10.2 bn invested by PE players since 2006 in India is likely to see withdrawal to the tune of USD 5 bn. in the next few years. All this translates to the fact that the builders would have to sell aggressively in a market where demand is medium to low or offer discounts/price correction (10-20%) to spur demand which would again mean cuts in profits. Those builders that over-leveraged will be in tight spot to repay their debts.”
In Europe, the debt funding gap remains elevated compared to six months ago. Downgrades to our forecast of capital values means Europe’s funding gap rose 4% to US$122bn. However, compared to our analysis in November 2010, Europe’s debt funding gap has reduced by 27% from US$167bn. It shows that the passing of time and an associated partial value recovery has helped alleviate some of the problems.
At a country level we have seen a small increase in the funding gap across Europe, including the UK (+4% to US$43.8bn), Spain (+17% US$28.7bn) and Ireland (+10% to US$13.5bn). The exceptions include France (down 25% to US$8.1bn) and Germany (down 16% to US$5.5bn) where our outlook has shown a modest improvement. On a relative basis, Ireland remains most exposed with its debt funding gap equivalent to 21% of its invested stock. Spain and the UK also have relatively high debt funding gaps equivalent to 6% and 5% of invested stock respectively.
Overall we estimate there to be more than sufficient equity (US$399bn) to match the debt funding gap. This is more than three times the level of the debt funding gap. Again there are regional variations. In Europe the amount of available equity is just US$156bn, a mere 28% above Europe’s debt funding gap of US$122bn. In Asia Pacific available equity is more than four times higher than the debt funding gap.
Nigel Almond, Associate Director of Forecasting & Strategy at DTZ and author of the report comments: “Over the past six months we have seen an increase in the number of loan sales coming to the market in Europe. As the pressure on banks to shrink their balance sheets manifests itself further, we expect this trend to continue. More recent loan portfolio sales have attracted discounts in the region of 20-30%, lower than many opportunity funds were targeting. The recent increased interest from SWF and institutions is likely to have played a role in this.”
Hans Vrensen, Global Head of DTZ Research, said: “We also see growing interest from non-bank lenders stepping in to provide additional lending capacity. Compared to six months ago we expect to see more lending capacity from insurers which could reach US$150bn over the next three years, up from our previous estimate of US$80bn. Combined with additional sources of funds from institutions and other niche lenders, they have started to provide much needed capacity for new lending and refinancing.”
