Lenders are becoming increasingly willing to write loans against lower quality properties, reducing the funding gap for grade-C assets, according to new research by DTZ.
The agent’s Debt Funding Gap report found banks and non-bank lenders have begun to view older and low-grade buildings more favourably, making it easier to refinance legacy loans as well as bringing fresh capital to the market.
The report estimates the refinancing gap of maturing debt on commercial property across Europe, providing a detailed analysis of the UK’s funding gap by property grade using estimates for originations, changes in values and origination loan-to-value ratios.
DTZ found grade-C properties had a debt position that was no riskier than that of more modern commercial properties.
Head of strategy research and report author Nigel Almond said the UK’s refinancing gap for grade C is a relatively modest £1bn over 2013/14.
This compares with £3.6bn for grade A and a further £9.8bn for grade B.
“The larger refinancing gap on grade A and B assets is due to their higher absolute values and related amounts lent against them,” he said.
“However, on a relative single-asset basis, grade C is impacted as much as grade A. Assuming a notional asset value of £100m in 2006, the refinancing gap today for a grade C asset would be £36m, compared with £38m on grade A.”
The lower absolute gap on secondary properties should trigger more lenders to move into the market, as the downside risk for the smaller stock of buildings is not significantly different, the report said.
Hans Vrensen, global head of research at DTZ, said: “This UK analysis confirms our earlier held views that lower quality assets are not necessarily in a worse position than higher quality assets, due their legacy debt positions.
“In addition, we suspect that the same fundamentals will hold true across other European markets. We expect that this will further assist market participants to put risk in its proper perspective and become more active in refinancing legacy loans secured by lower quality assets. As long as pricing remains sufficiently attractive, we anticipate that a number of lenders will be moving into the grade C and B segments.”
The overall net debt funding gap for Europe has shrunk 16% from $50bn to $42bn since May 2013.