The UK’s property market has one of the lowest debt funding gaps across the globe, according to research from AEW.
AEW’s Hans Vrensen said 2024 will be a ‘critical year’ for the global debt market
The worldwide analysis by the real estate investment and asset manager showed Europe’s funding gap stands at 16% of loan originations, closely followed by the US at 14%, with Asia Pacific remaining relatively immune.
However, the UK market is performing better than other global regions, with a funding gap of 9%, as is southern Europe, with an 11% gap.
AEW’s analysis also found office loans were the primary concern across all three global regions, followed by multi-family housing and retail, where capital values have fallen sharply in the recent economic cycle.
In Europe, Germany and the Nordics have the highest debt funding gap, at over 22% and 18% respectively.
In the US, office and retail had debt funding gaps of 37% and 29% respectively, well above the 14% US average.
The research found a more diverse landscape in the Asia Pacific region, with major markets such as Australia, Singapore, South Korea and Japan, as well as Tier 1 cities in China, all facing a debt funding gap of 7.6%, lower than in both the US and Europe.
Around 60% of Asia Pacific’s gap is concentrated in the office markets of Australia and Tier 1 cities in China, with an additional 30% in the retail sector.
The shorter, three-year loan tenures in the region and slow adjustment of property valuations/pricing contribute to the region’s comparatively low relative debt funding gap.
Hans Vrensen, head of AEW research and strategy, said: “This is the first time we’ve expanded our debt funding gap analysis to show the extent of the refinancing challenge globally. Europe has the widest gap, closely followed by US, with Asia relatively immune.
“Unsurprisingly, the office sector shows the widest gap, particularly in the US, where the post-Covid return to work is significantly behind the rest of the world, putting pressure on the asset class and restricting appetite for lenders and investors alike.
“With many commentators believing interest rates have peaked and some early confidence returning to the market, 2024 will be a critical year for real estate globally.
“The scale of the debt funding gap challenge and its impact on local markets ultimately depends on investors and lenders’ ability to cure associated defaults and absorb potential losses.”
In December, CBRE estimated that €640bn (£551bn) in private real estate debt was originated across Europe between 2019 and 2022, and 27.5% of this may not be refinanced when the debt matures over the next four years