In Europe in particular, the crisis in the sector seems to be deeper, as companies face enormous pressures and many difficulties await them, especially in light of the high costs of credit, in addition to the fall in valuations, which contributed to the loss of approximately $148 billion in the value of these assets.
According to a report published by Bloomberg, it:
Real estate companies hold about $165 billion in bonds maturing until 2026. Banks, meanwhile, are reducing their exposure to the sector and credit costs are at their highest level since the financial crisis. This reality put some companies at risk of being downgraded and made borrowing more costly for them.
Headwinds for developers include a slump in the value of office and office buildings from London to Berlin, making property the current least preferred industry among fund managers for the third consecutive month, according to a survey by Bank of America Corp.
The price of major office buildings in Paris, Berlin and Amsterdam has fallen more than 30% in 12 months, according to brokerage firm Savills Pl.
With soaring debt, many real estate companies will have to resort to selling assets and cutting dividend payments, in order to cope with signs of a “more turbulent future”.
The top-to-bottom selling since August 2021 has pushed the Stoxx 600 to an all-time high.
For his part, the academic director of the Ohio University Center for Real Estate, Zahi Ben David, describes in statements exclusive to the site “Sky News Arabia Economy” what real estate companies are facing as a “storm”, noting that they “face pressure from all sides (rise in rates, fall in rates), valuation of assets, tightening of banking regulations, current lack of attractiveness of the sector for fund managers).
He stresses the importance for these companies to adopt flexible strategies to navigate this turbulent environment, noting that “at the heart of the problem facing the partners is the enormous debt burden, amounting to 165 billion of dollars, which should be refinanced by 2026”.
And the real estate industry expert continues in his interview with “Sky News Arabia”:
Banks began to withdraw from the real estate sector (reducing their exposure to the sector), forcing these companies into a dilemma, as they had to resort to more expensive refinancing options. Businesses will have to make tough decisions as a result. It may be necessary to sell assets, reduce profits and turnover, in order to ensure survival. Companies need to reevaluate their financial models to adapt to this new era of expensive borrowing.
He adds: “Many companies have used the low interest rate environment to achieve high levels of leverage…and therefore over-indebtedness…the end of the era of cheap money (the period when interest rates were close to zero) left such companies exposed”, and the crisis became clear after central banks followed the policy of increasing interest.
But he thinks there can be real opportunities despite the current challenges, through the market going through a process of correction, and he says: “While this is painful in the short term, it can lead to more sustainable practices at the future. can also create opportunities for investors looking for undervalued assets.
“However, this is not a market for the faint of heart,” he adds. “A thorough understanding of the sector and careful risk assessment will be essential for those considering entering the market.”
“The maturity wall (referring to $165 billion in bonds maturing through 2026) could be a catalyst for new transactions to occur, because if borrowers are unable to refinance, they will have to come out… There will be more assets sold in the market at deplorable levels.”
The Bloomberg report cites the case of Swedish property company Samhallsbyggnadsbolaget i Norden AB to highlight the European landlord crisis, as a stark example of what happened in the market:
The company’s stock price has fallen more than 90% from its all-time high. The $8 billion debt, which was used to build a portfolio of over 2,000 properties, turned into a heavy burden after the cheap money period ended. While the company has already been downgraded, the market is pricing in opportunities for other companies to follow. According to a quantitative model run by Bloomberg, the majority of real estate bonds in the euro high-quality bond index were issued by companies that now have a more typical credit quality than those with junk status. Unless they can reduce their debt or borrowing rates drop again, they will likely have to pay higher rates for their credit when it finally comes to refinancing.
Sharp increase in spending
For his part, real estate expert in Great Britain, Jonathan Rowland, indicates in exclusive statements to “Sky News Arabia Economy” that “banks were slow to raise interest rates after the end of the epidemic, and wealth has accumulated and with the desire for life to return to normal after the shutdown, this has led to a sharp increase in spending that few expected.
And he continues: “The scarcity of materials and labor led to higher prices, and the war in Ukraine then made matters worse, as it caused high inflation, which the banks fought by increasing interest rates, which affected those who borrowed to invest. and so all of this has led to lower real estate prices.
He highlights the difficulty of predicting the future scenarios that await the sector, stating: “It is always difficult to predict in the field of real estate, especially now more than ever. However, if inflation continues to decline as it appears, the pressures to raise interest rates will further diminish and may even begin. If that happens and things aren’t exacerbated by another unforeseen global event, the future for real estate looks good, while investors who are still brave enough to buy should be more cautious than ever. ”
But on the other hand, “there could be worse to come,” Citigroup analyst Aaron Jay wrote this month: “Commercial real estate values in Europe could fall by up to 40% due to of the reversal in the debt market.” Bloomberg.
Owners may need to increase their capital by around 50% when refinancing an asset in order to meet the standards imposed by banks and private credit funds. This is based on a refinance rate of 6%.
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