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Investors are questioning the health of the commercial real estate sector following a string of recent banking crises.<\/p>\n
Mike Kemp | In Pictures | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
Concerns are mounting around the health of Europe’s commercial real estate market, with some investors questioning whether it could be the next sector to implode following last month’s banking crisis.<\/p>\n
Higher interest rates have increased the cost of borrowing and depressed valuations in the property sector, which in recent years reigned supreme amid low bond yields.<\/p>\n
Meanwhile, the collapse in March of U.S.-based Silicon Valley Bank<\/a>\u00a0and the later emergency rescue of Credit Suisse<\/a> prompted fears of a so-called doom loop, in which a potential bank run could trigger a property sector downturn.<\/p>\n The European Central Bank earlier this month warned of “clear signs of vulnerability” in the property sector, citing “declining market liquidity and price corrections” as reasons for the uncertainty, and calling for new curbs on commercial property funds<\/a> to reduce the risks of an illiquidity crisis.<\/p>\n Already in February, European funds invested directly in real estate recorded outflows of \u00a3172 million ($215.4 million), according to Morningstar Direct data \u2014 a sharp contrast from the inflows of almost \u00a3300 million seen in January.<\/p>\n Analysts at Citi now see European real estate stocks falling by 20%-40% between 2023 and 2024 as the impact of higher interest rates plays out. In a worst-case scenario, the higher-risk commercial real estate sector could plummet 50% by next year, the bank said.<\/p>\n “Something I would not overlook is a crisis in real estate, both for private people and for commercial real estate, where we see a downward pressure both in the United States and in Europe,” Pierre Gramegna, managing director of the European Stability Mechanism, told CNBC’s Joumanna Bercetche in Washington, D.C. Friday.<\/p>\n<\/div>\n The office segment \u2014 a major component of the commercial real estate market \u2014 has emerged as central to potential downturn fears given wider shifts toward remote or hybrid working patterns following the Covid pandemic<\/a>.<\/p>\n “People are concerned that the back-to-office hasn’t really materialized, such that there are too many vacancies and yet there is too much lending in that area, too,” Ben Emons, principal and senior portfolio strategist at U.S.-based investment manager NewEdge Wealth, told CNBC’s “Squawk Box Europe<\/a>” last month.<\/p>\n<\/div>\n People are trying to understand which banks have lent where, to what sector, and what’s really the ultimate risk.<\/p>\n Ben Emons<\/p>\n principal and senior portfolio strategist at NewEdge Wealth<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/blockquote>\n That has deepened worries about which banks may be exposed to such risks, and whether a wave of forced sales could lead to a downward spiral.<\/p>\n According to Goldman Sachs, commercial real estate accounts for around 25% of U.S. banks’<\/a> loan books \u2014 a figure that rises to as much as 65% among smaller banks, the focus of recent stressors. That compares with around 9% among European banks.<\/p>\n “I think people are trying to understand which banks have lent where, to what sector, and what’s really the ultimate risk here,” Emons added.<\/p>\n Amid that uncertainty, and what it called stretched valuations, Capital Economics last month increased its forecast<\/a> for a peak-to-trough euro zone property sector correction from 12% to 20%, with offices expected to come off worst.<\/p>\n “We see this financial distress, or whatever you want to brand it, <\/strong>as a catalyst for a deeper adjustment in value than we previously expected,” Kiran Raichura, Capital Economics’ deputy chief property economist, said in a recent webinar<\/a>.<\/p>\n<\/div>\n Not everyone is convinced of a forthcoming downturn, however.<\/p>\n Pere Vinolas Serra, chief executive of Spanish real estate company Inmobiliaria Colonial and chairman of the European Public Real Estate Association, said the situation in Europe looks paradoxically strong.<\/p>\n Among the various factors at play, the return-to-office trend has been stronger in Europe than the U.S., he said, while office “take-up” \u2014 or occupancy \u2014 rates have been higher on the Continent.<\/p>\n “What is striking is that the data shows it’s better than ever,” Vinolas told CNBC via Zoom. “There’s something totally different going on in the U.S. versus Europe.”<\/p>\n<\/div>\n European funds invested directly in real estate recorded outflows of \u00a3172 million compared to inflows of almost \u00a3300 million seen in January, according to data from Morningstar Direct.<\/p>\n Westend61 | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n As of late 2022, European office vacancy rates stood at around 7%, well below the 19% in the U.S., according to real estate adviser JLL. Within Inmobiliaria Colonial’s portfolio, Vinolas said current vacancy rates were even lower, at 0.2% in Paris and 5% in Madrid.<\/p>\n “I’ve never seen that in my life. The data on occupancy rates is at the very highest level,” Vinolas said.<\/p>\n JPMorgan mirrored that view late last month, saying in a research note<\/a> that fears of a U.S. downturn spreading to Europe were overblown.<\/p>\n “Fundamentally, we believe that any contagion from either U.S. banks or U.S. CRE (commercial real estate) onto European peers is not justified, given different sector dynamics,” analysts at the bank said.<\/p>\n<\/div>\n Still, uncertainties remain in the sector, analysts warned.<\/p>\n Of particular concern is the concentration of funding from nonbank lenders \u2014 or so-called shadow banks \u2014 which have picked up the slack in the wake of tighter regulation on traditional banks, said Matthew Pointon, senior property economist at Capital Economics.<\/p>\nA reckoning for office space<\/h2>\n
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Risks in Europe less acute than in the U.S.<\/h2>\n
Uncertainties and opportunities ahead<\/h2>\n