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DTZ suggests real estate debt-funding gap more than halved

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EUROPE – Alternative property lenders have helped slash the debt funding gap in the UK by more than half, according to DTZ, although the finding assumes debt funds are able to meet capital-raising targets.

DTZ's latest report suggests the net debt-funding gap has fallen over the past six months by 55% in the UK, 20% for Europe as a whole and 17% globally, mainly as a result of new non-bank lenders and corporate bond issuance.

Hans Vrensen, global head of research at DTZ, told an audience in London this week that the picture had "evolved dramatically" since the last report in May.

"The solution is coming through a lot quicker than we anticipated," he said, suggesting that refinancing shortfall could be resolved by 2015.

The findings, which are based on a number of assumptions and take into account new banking regulations, will be good news for real estate investors that rely on debt financing.

But for those seeking to take advantage of the lack of traditional finance in the market, it might make for disappointing reading.

However, DTZ's findings are based on the assumption that a growing number of companies seeking to launch debt funds will succeed in raising enough capital to make a significant mark on the financing market.

The gross funding gap – that is, the size of the refinancing shortfall before taking into account non-bank finance – has actually grown since May, due to regulatory factors and a deteriorating economic outlook.

DTZ forecasts that the effect of insurance companies, debt funds and the public debt markets will more than counteract this.

The report estimates that insurers and debt funds will provide nearly £13bn (€16.1bn) in financing over the 2012-13 period.

Nigel Almond, associate director at DTZ and author of the report, said insurance companies currently dominate the non-banking lending sector with about 66% of the market.

But he also predicted that the "long-term growth" would come from debt funds.

A growing number of fund managers have launched European debt funds, but economic uncertainty and investor caution have prolonged capital-raising programmes.

Paul Dittmann, head of senior commercial mortgages at M&G Investments, questioned whether all debt funds in the market would make it off the ground.

He estimated that 35 firms were seeking to launch debt funds two years ago, and only five were eventually successful.

Vrensen told IP Real Estate that the report assumed "specific targets per manager, which are mostly unstated".

Asked if the assumptions were optimistic, he said: "You might call this optimistic, but it is supported by market evidence."

Recent corporate bond issuance by property companies was also cited as a particularly unexpected and influential factor in bridging the European funding gap.

Almond said DTZ had not foreseen this in its previous report six months ago.

The report shows that $15bn of corporate bonds have been issued in the first three quarters of 2012, 31% above that for the whole of 2011 and greater than levels seen in 2006-07.

"Assuming this trend continues, we expect the full-year volumes to reach €15bn," the report said. "We estimate a similar level of activity in 2013."

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