European property companies are bracing for new challenges as interest rate hikes and declining valuations have taken away $148B of shareholder value. Banks are scrambling to reduce their exposure to the commercial real estate industry at a time when credit costs are the highest since the Great Financial Crisis. Property companies suffer the risk of being downgraded to junk status. SBB, which was recently downgraded, was targeted by short sellers and lost $15B of its market share. Europe's property companies are getting ready for some financial heat, as a staggering $165B in bonds are expected to mature by 2026. Office values have been crashing across the continent from London to Berlin. Bloomberg expects landlords to resort to asset sales, dividend cuts, and rights issues to rightsize their companies and prepare for financial turbulence. In Bank of America's Global Fund Manager Survey, commercial real estate was the least popular industry for the third consecutive month.
According to the head of EMEA at Chatham Financial, Jackie Bowie, the maturing debt could be a catalyst for transactions as borrowers who cannot refinance will be forced to sell. He believes more assets will be sold at distressed levels. SBB, which was recently downgraded to junk by S&P, replaced its CEO last week. The change in credit rating also forced the company to cancel its dividend and rights issue. SBB's share price has dropped 90% since the start of last year. Citigroup Inc. wrote in a note that European commercial real estate values were to drop by 40% owing to disruptions in the debt markets. It predicted landlords would have to provide around 50% additional equity to refinance an asset. Data from MSCI Real Assets revealed that during the first three months of this year, European commercial real estate investment declined to the lowest in 11 years. Offices sold decreased to the lowest on record, and the transaction volume plunged to 10.8B euros (~$11.94B). The U.K. retained its position as the continent's largest commercial real estate market. However, Paris surpassed London as the most active investment destination. At the start of this year, the European Systemic Risk Board (ESRB) warned the stress in the commercial real estate sector could become a systemic risk for banks and lead to higher capital needs. The EU's risk watchdog recommended national and EU authorities monitor risks and have lenders properly assess collateral. The ESRB's president, Christine Lagarde, said climate-related economic policies, the rise of e-commerce, and increased demand for flexibility in office space are adding to the pressure on property owners. |
