Insurers, sovereign wealth funds to plug real estate lending gap

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Insurers and sovereign wealth funds could supply more than three times the equity needed to plug an estimated global funding gap that has fallen 27% to $142bn (€103bn) over the past six months, according to research by DTZ.

The firm increased its forecasts for non-bank lending over the next three years from $80bn to $150bn based on new capacity as a result of lending from insurers and other non-bank lenders.

Funding from insurers alone will total €60bn.

The report’s authors said: “With more funds now entering this space and the potential for smaller insurance companies to co-invest with other insurers or banks, we expect to see an increase in lending capacity.”

Although the European funding gap has increased by 4% over the past six months – largely attributable to the widening debt gap to downgraded capital values forecasts in the UK, Spain and Ireland – the 10 existing European insurance funds could increase their activity in the UK, with as many as 25 new insurers entering the market in the next three years.

Despite the predicted new entrants, the report noted that only $156bn of equity would be available in Europe to plug a funding gap of $122bn.

That contrasts with $399bn available globally to plug a $142bn funding gap.

The report said: “The weakness in Europe’s debt funding gap is not surprising given the wider sovereign debt issues and pressure on banks’ balance sheets.”

With banks likely to bring loan portfolios to market under regulatory pressure to boost their capital reserves by a collective €106bn, DTZ said it viewed recent interest from sovereign wealth funds, insurers and other institutional investors in the portfolios as “a very positive sign”.

The report pointed to China Investment Corporation’s (CIC) support for Blackstone’s acquisition of the £1.4bn (€1.6bn) RBS loan portfolio as an example of institutional capital entering the market.

Further activity from CIC and other sovereign wealth funds is likely if the deal proves successful.

One impact of institutional investor activity will be a narrowing of the price mismatch on loan sales.

While some funds raising capital for distressed loans are still demanding discounts of more than 60%, discounts on more recent loan sales have averaged at 20-30%.

Although it welcomed lending from institutional investors, the report cautioned against other forms of corporate lending where underwriting standards “may not be as robust” with other institutions, which could lead to “further problems down the road”.

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