Financing gap or funding gap: what it is and its implications for the market

The funding gap, or financing gap, is a financial phenomenon that occurs when the capital needed to refinance debt exceeds the amount of credit available in the market.

This imbalance is often the result of a combination of economic factors, including rising interest rates and decreasing asset values. Five years ago, interest rates were significantly lower, making credit more accessible and increasing the value of real estate assets; however, today, with higher interest rates and stricter credit conditions, asset values have decreased, creating a gap between the originally contracted debt and the ability to refinance it under the same conditions.

MARKET DATA ON THE FINANCING GAP IN THE REAL ESTATE SECTOR

The European real estate sector is at the center of this phenomenon. It is estimated that approximately €640 billion in private real estate debt were originated between 2019 and 2022. Of this total, €176 billion (about 27.5%) may not be refinanced when the debt matures over the next four years, due to current asset values and high interest rates.

As a result, investors face increasing difficulties in refinancing debt originated during the 2019-2022 period.According to Green Street’s analysis, key European real estate markets will face a funding gap of €93 billion through 2026. In particular, 2024 is shaping up to be a crucial year for refinancing, with a gap of €51 billion expected for the 2023-2025 period in the major markets of the UK, France, and Germany. Alternative solutions, such as private debt and financing from non-bank lenders, are playing an increasingly important role in mitigating this financing shortfall.

FUTURE OUTLOOK AND STRATEGIES TO REDUCE THE FUNDING GAP

Let’s now explore the different types of real estate assets and future forecasts regarding the funding gap, supported by interesting data from CBRE. Currently, the funding gap is particularly evident in the Office and Multifamily sectors, where it is estimated to reach €82 billion and €68 billion, respectively. In the Office sector, this deficit will be spread relatively evenly over the next four years, while in the Multifamily sector, the problem will mainly concentrate in 2026 and 2027, due to high levels of investment made between 2021 and early 2022. A similar pattern is expected in the Logistics sector.

In the Retail sector, the funding gap is relatively smaller, but in percentage terms, the widest gap is found in what is known as High Street Retail – investments in high-profile real estate assets for retail purposes in the central and prestigious areas of major European cities – with a 30% gap. Nonetheless, the overall impact of the funding gap could be mitigated by joint action between lenders and borrowers, who may work together to renegotiate the terms of maturing loans.

Looking ahead, market conditions are expected to improve, which could reduce the funding gap through gradually lower interest rates and recovering real estate values. Estimates suggest that the debt gap will decrease by €62 billion, falling to €114 billion between 2024 and 2027, a 35% contraction. 

The sectors most affected by a reduction in the funding gap are expected to be Multifamily, Office, and Logistics, with reductions of €30 billion, €20 billion, and €11 billion, respectively.

Project selection by asset class is critical in real estate: understanding market trends to evaluate which asset classes are rising and which are declining in value is the key to making investments that maintain value over time. We discussed this in depth in this dedicated article.