The funding gap in the UK real estate investment market is less than half of what it stood at during the great financial crisis, according to analysts at AEW.
In a new report, Hans Vrensen, head of research and strategy for AEW in Europe, calculates countries’ debt funding gaps as the difference between debt originally secured against real estate assets and the borrowing that can be achieved when refinancing with lower LTV ratios from banks and declining values. In the UK, Vrensen said, the debt funding gap stands at about £30bn, or 16% of outstanding loans for the 2020-2023 period. This compares to £70bn, or 30% of outstanding loans, during 2008-2011.
“The reason for the lower DFG in 2020-2023 is mainly because of stricter bank regulations in the aftermath and more conservative acquisition LTVs,” Vrensen wrote. “In addition, we expect capital value declines to be less severe compared to the GFC.”
The AEW team expects the UK debt funding gap as a result of Covid-19 to be sector-specific, with retail accounting for 45%.
“Capital values are expected to decline as a result of the Covid-19 related lockdowns due to their impact on GDP growth, tenants’ ability to pay rent and increased liquidity and volatility risk premiums,” Vrensen wrote. “Based on our forecasts, the impact on retail values is going to be more severe than in offices and logistics. This is mostly due to a significant one-off step up in e-commerce penetration during the lockdowns, its long term impact on retail tenants and investors’ return requirements.”