Berlin (unsplash photo)
Concerns are mounting over the state of Europe’s commercial real estate market, with some investors wondering if it could be the next sector to fall following last month’s banking crisis. Higher interest rates have increased the cost of borrowing and reduced valuations in the property sector, which has dominated in recent years amid returns low bonds.
Meanwhile, the March collapse of Silicon Valley Bank and the emergency bailout of Credit Suisse raised fears of a so-called “doom loop,” in which a potential bank run could trigger a decline in the property sector.
The European Central Bank warned earlier this month of “clear signs of vulnerability” in the real estate sector, citing “decreased market liquidity and price corrections” as reasons for the uncertainty, and called for curbing news about commercial real estate funds to reduce the risks of a liquidity crisis.
Already in February, European funds invested directly in real estate recorded outflows of 172 million pounds ($215.4 million), according to Morningstar Direct data — a sharp contrast to the nearly 300 million pounds of outflows seen in January.
Analysts at Citi now see European property stocks falling 20%-40% between 2023 and 2024 as the impact of higher interest rates plays out. In a worst-case scenario, the riskier commercial real estate sector could fall by 50% to Next year, the bank said.
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The office sector – a major component of the commercial real estate market – has emerged as central to potential concerns of a decline given wider shifts towards remote or hybrid working patterns following the coronavirus. lending in that area as well,” Ben Emmons, NewEdge Wealth chief investment officer, told CNBC’s “Squawk Box Europe” last month.
“I think people are trying to understand which banks lent where, to which sector, and what is really the ultimate risk here,” added Emmons.
Per Viñoles Serra, CEO of the Spanish real estate company Inmobiliaria Colonial and chairman of the European Public Real Estate Association (EPRA), said the situation in Europe seems paradoxically strong. Among the various factors at work, the return to office trend was stronger in Europe than in the US, he said, while office occupancy rates were higher on the continent.
“What’s amazing is that the data shows that it’s better than ever,” Vinoles told CNBC. “Something completely different is happening in the US compared to Europe.”
As of the end of 2022, office vacancy rates in Europe stood at around 7%, well below the 19% in the US, according to real estate consultant JLL. In Inmobiliaria Colonial’s portfolio, Vinolas said vacancy rates are even lower, at 0.2% in Paris and 5% in Madrid.
“I’ve never seen it in my life. The figures on the occupancy rates are at the highest level,” Vinoles said.
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