Shares of European real estate groups are on track for their worst month since the start of the pandemic, as investors bet weeks of banking turmoil will tighten access to credit and send property valuations plummeting.
The MSCI Europe Real Estate index of large- and mid-cap property companies fell near its lowest level since the start of 2009 after falling 24% so far in March, massively underperforming the Stoxx equity index 600 at the regional level, which is down 2.4% over the same period.
analysts and investors have been worried for months on the impact of rising interest rates on the commercial real estate sector on both sides of the Atlantic, but these fears have crystallized since the bankruptcy of the Californian lender Silicon Valley Bank in early March and the forced sale of Credit Suisse to rival UBS a little over a week later.
Some now expect a looming credit crunch to cut funding for property groups, many of which are already struggling with higher debt costs and stagnant occupancy rates.
Northern European real estate is a ‘zero rate junkie sector’ and a potential ‘bubble’ that could burst once higher interest rates are properly factored into property valuations, according to Andromeda Capital Management , based in London. Ratings agency Moody’s said this week that rollover risk in the sector had “significantly increased”, with companies holding debt maturing in the next few years likely to come under particular pressure from higher payments. of interests.
“Low interest rates have been a subsidy for commercial real estate for 15 years. This is a giant reset for the industry,” said Ron Dickerman, president of Madison International Realty. “All real estate is probably worth less now than it was six or 12 months ago.”
Property valuations are down around 10% from their peak in June 2022, according to the MSCI European Quarterly Property Index. Citigroup expects valuations in Western Europe to fall another 20-40% before the end of next year, while property stocks could halve in value over the same period.
Shares in German real estate group Vonovia have fallen 30% since early March to the lowest level on record, with Luxembourg’s Aroundtown, France’s Gecina and Britain’s Segro down 42%, 13% and 9% respectively in the past four weeks.
Goldman Sachs last week downgraded British Land to “sell”, citing the group’s high asset exposure to the City of London, where many companies have adopted hybrid working models since the Covid-19 outbreak.
Agnès Belaisch, chief European strategist at the Barings Investment Institute, said the European real estate sector should prepare for “a lot more” interest rate hikes given that the European Central Bank, unlike the US Federal Reserve, ” does not seem discouraged by the financial strains and confident that the region’s banks are well capitalized and liquid”.
American real estate groups are faring a little better than those in Europe so far. The MSCI US Real Estate Investment Trust index has fallen 8.5% since the start of the month, despite the reliance of national real estate companies on funding from regional banks at the center of investors’ concerns. “In Europe, lending to real estate groups is concentrated in the big banks,” Belaisch said.
The composition of US and European property indices could explain some of the difference in performance, according to Mark Unsworth, head of property economics at Oxford Economics. “The United States has a much more mature listed real estate universe,” he said, with REITS specializing in alternatives like data centers, self-storage and healthcare comprising a larger share. “Europe will be more exposed to offices, industry and commerce where the relative impact [of higher rates] we expect it to be bigger”.
Even so, Paul Ashworth, chief U.S. economist at Capital Economics, said that in the worst-case scenario, a “catastrophic loop” could develop between smaller banks and commercial real estate, where concerns about bank viability lead. to a flight of deposits, forcing lenders to call in commercial real estate loans – “a key part” of their asset base.
Private lenders could also find themselves caught off guard. In December, US private equity group Blackstone limited withdrawals from its $125 billion privately owned fund following an increase in redemption requests.
