Europe: Real estate investment manager AEW is forecasting a default rate of 7.5 per cent across loans originated between 2018 and 2021.
Despite a recent reduction in borrowing costs, AEW’s research says borrowers are still facing challenges when looking to refinance. It is thought up to €42.5 billion of debt originated in that three year period is likely to default.
AEW applied a three-step methodology to estimate the volume of loans that would not be refinanced at maturity, and the recoveries lenders would make on defaulted facilities.
It estimated a 7.5 per cent default rate on the maturing debt, and 2.5 per cent loan loss rate, leading to its conclusion that lenders could lose up to €14.5 billion on 2018 to 2021 loans. The projected loss rate is in line with that in the aftermath of the GFC, the company said.
Hans Vrensen, head of research and strategy for Europe at AEW, said: “Despite a projected reduction in eurozone borrowing costs to 3.4 per cent by the end of 2025, we estimate default at 7.5 per cent of the €572 billion in CRE loans originated in 2018/21 and projected CRE losses of up to €14.5 billion for European CRE lenders. The majority of European banks are expected to remain resilient in the face of these losses as, post-GFC, lenders are better capitalised and regulated. There could be a possible exception for some German covered-bond funded banks while some emerging nonbank CRE lenders in Europe will also be tested in the coming years.”
AEW said that 19 per cent of loans now have a loan-to-value of more than 100 per cent across nine key European markets.
The retail sector is likely to be the hardest hit, with retail-backed loan losses across Europe potentially reaching 11 per cent, or €9 billion, of €80 billion of 2018 to 2021 loans in the sector.
