Madigan Capital report gets write up in the AFR: The $45b funding gap in commercial property

At Madigan Capital, thought leadership is not merely a value; it’s a driving force.

An enlightening new report by Madigan (with contributions by economist, Dr David Rees) provides valuable insights into Australia’s commercial property sector and firmly establishes Madigan’s position as a thought leader in this domain.

So much so that Robert Harley of the Australian Financial Review, picked up the report and penned a compelling narrative about the looming challenges and significant opportunities facing those in the sector. Read more about Robert Harley’s opinion piece here.

‘Mind the Gap’ – Madigan Market Insights Report, paints a detailed picture of a ‘$45b funding gap’ emerging through 2024 for the Australian commercial real estate sector as markets adjust to rapid rises in interest rates, the impact of the COVID-19 shock, and a tougher regulatory environment for banks and debt providers.

Over the next few years, this funding gap will present challenges for property owners while those with available capital will encounter substantial opportunities.

What drives this funding gap?

1. The cost of debt will rise as existing loans mature and are refinanced by existing lenders at higher interest rates or often on more restrictive terms.

2. Falling capital values as market transactions confirm the downgrades already implicit in REIT market pricings in recent transactions.

3. A rising demand for access to flexible finance as owners and investors adjust portfolios and investment programs to a new and evolving set of investment options, opportunities and constraints.

Our analysis estimates that a 20% decline in average core commercial asset values – office, retail and industrial, implies a funding gap of approximately $39 billion, which represents around 15% of all bank lending to these sectors. Additionally, there is a need for $6.1 billion in recapitalisation for the less traditional sectors such as land development and tourism, resulting in an estimated gap blow out of $45 billion.

The recapitalisation of commercial real estate will dominate the sector in 2024 and 2025 with demand for real estate exposure in the APAC region to persist. The funding gap will be filled with a range of different capital sources including equity, preferred equity, convertible notes, bond issues and secured lending. Asset owners will require access to flexible and alternative sources of capital in order to optimise capital structures and retain their ability to maximise portfolio value in the medium to longer term.

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To find out more about ‘Mind the Gap – Madigan Market Insights Report,’ please contact Kris Staltare, Associate Director, Madigan Capital via email, info@madigancapital.com.