european real estate
The real estate industry remains at the heart of the industry most affected by the wide-ranging and rapid developments in the global economy, in a series of influential interactions with various developments, from the start of the corona pandemic, to the war in Ukraine and its end to various economic impacts .
Especially in Europe, the crisis in the industry seems to be deeper, as companies are under great pressure and many difficulties await them, especially considering the high cost of loans, as well as the decline in valuations, which resulted in approximately US$ 148 billion in the value of these assets.
According to a report published by Bloomberg, it:
- Real estate companies have approximately $165 billion in bonds maturing through 2026.
- Banks, on the other hand, are reducing their exposure to the sector, with credit costs at their highest level since the financial crisis.
- That reality puts some companies at risk of being downgraded to junk status and makes their borrowing more expensive.
Headwinds for developers include plunging office and office property values from London to Berlin, making real estate the current least favorite sector for fund managers for the third month in a row, according to a Bank of America survey.
Prime office prices in Paris, Berlin and Amsterdam have fallen more than 30% in 12 months, according to brokerage Savills Pl.
With debt swelling, many real estate companies will have to resort to asset sales and cut dividend payments in response to signs of a “more turbulent future”.
The peak-to-trough sell-off since August 2021 has pushed the Stoxx 600 to new all-time lows.
storm
For his part, Zahi Ben David, academic director of Ohio University’s Center for Real Estate, described the “storm” facing real estate companies in an exclusive statement to the Sky News Arabian Economy website, noting that they are “under pressure from all sides ( Rising interest rates, falling interest rates), asset valuations, tighter banking regulation and the industry’s current unattractiveness to fund managers).
He stressed the importance of these companies adopting nimble strategies to navigate this turbulent environment, noting that “at the heart of the problems faced by the partners is a huge debt load, totaling $165 billion, which is expected to be refinanced through 2026. “
Speaking to Sky Arab News, the real estate industry expert continued:
- Banks started withdrawing from the real estate industry (reducing their exposure to the sector), forcing these companies into a dilemma as they had to resort to more expensive refinancing options.
- Companies will have to make tough decisions accordingly.
- Assets may need to be sold, reducing profits and turnover to ensure survival.
- Companies must reassess their financial models to adapt to this new era of high borrowing costs.
He added, “Many companies have taken advantage of the low interest rate environment to achieve high debt leverage…and thus become overindebted…The end of the cheap money era (period of interest rates near zero) has left such a The company was exposed”, and the crisis was evident after the central bank adopted the policy of raising interest rates.
But he believes that despite the current challenges, through the process of market adjustment, there may be real opportunities, saying: “While this is painful in the short term, it may lead to more sustainable practices in the future… …it can also create opportunities for investors who are looking for undervalued assets.”
“However, this is not a market for the faint of heart,” he added, “a solid understanding of the industry and careful assessment of risks will be key for those planning to enter this market.”
refinancing
“The maturity wall[referring to the $165 billion in bonds due in 2026]could be a catalyst for new deals to happen because if borrowers can’t refinance, they’ll have to pull out…then more will be sold Asset markets are at miserable levels.”
The Bloomberg report cites the case of Swedish real estate firm Samhallsbyggnadsbolaget i Norden AB to point to the European landlord crisis as a vivid example of what is happening in the market:
- The company’s shares have fallen more than 90% from their all-time highs.
- The $8 billion in debt, used to build a portfolio of more than 2,000 properties, became a liability after the period of cheap money ended.
- While the company has been downgraded, the market is pricing in the possibility of others following suit.
- According to quantitative models run by Bloomberg, the majority of real estate bonds in the euro prime bond index are issued by companies that now have a more typical credit quality than junk rating.
- Unless they can reduce their debt load or borrowing rates come down again, they may have to pay higher rates on their credit when they eventually refinance.
sharp increase in spending
British real estate expert Jonathan Rowland said in an exclusive interview with Arab Economic Sky News, “The post-epidemic slowdown in bank interest rate hikes, wealth accumulation and a return to normal life after the shutdown has led to a sharp increase in spending that few expected. .
He continued: “The scarcity of materials and labor led to higher prices, the war in Ukraine then made things worse because it caused high inflation, and the banks responded by raising interest rates, which affected those who borrowed money to invest. So, this Everything led to a drop in real estate prices.”.
Pointing to the difficulty of predicting future scenarios for the sector, he said: “It’s always difficult to predict in real estate, and it’s more difficult than ever to predict in particular. But if inflation continues to fall, the pressure to raise rates will be further The decline may even begin.” If that happens, and is not exacerbated by another unforeseen global event, the future of real estate looks promising, and investors who still have the guts to buy should be more cautious than ever. “
“Worse” future!
But on the other hand, Citigroup analyst Aaron Jay wrote in a note this month: “Worse could be ahead:” Commercial real estate values in Europe could fall by as much as 40 percent as debt markets shudder. %. “Bloomberg.
Landlords may have to increase capital by around 50% when refinancing properties to meet standards set by banks and private credit funds. This is based on a 6% refinance rate.