Fears are growing over the health of the commercial real estate market in Europe, with some investors wondering if the sector will implode next.
In the wake of the banking crises last March, concerns have arisen over the so-called doom loop, where a potential bank run could lead to a contraction in the real estate sector. In the aftermath of the banking crises last March, fears of a so-called doom loop arose, where a potential bank run to exit any high-risk investments could trigger a downturn in the real estate sector.
European funds directly invested in real estate recorded outflows of £172 billion ($215.4 billion) in February, according to Morningstar Direct data.
European funds directly invested in real estate recorded outflows of £172 billion ($215.4 billion) in February, according to Morningstar Direct data.
Some analysts now see real estate stocks falling 20%-40% by next year, possibly exceeding 50% in the worst-case scenario, meaning Europe is in for a crisis that could last months or even longer.
Europe is on the verge of a crisis that could last months or even longer. Higher interest rates have increased the cost of borrowing and low valuations in the real estate sector, which has prevailed in recent years amid low bond yields, amid declining buying interest.
Higher interest rates have increased the cost of borrowing and low valuations in the real estate sector.
At the same time, the collapse of Silicon Valley Bank in the United States in March and the subsequent emergency rescue of Credit Suisse led to fears of a so-called doom loop, where a potential bank run could trigger a downturn in the real estate sector.
<The European Central Bank earlier this month warned of “clear signs of weakness” in the real estate sector, citing "low market liquidity and price corrections" as causes of uncertainty, and called for new restrictions on commercial real estate funds to reduce the risk of a liquidity crunch. <Analysts at Citi now see European real estate stocks falling by 20% to 40% between 2023 and 2024 as the impact of rising interest rates kicks in. In a worst-case scenario, the high-risk commercial real estate sector could fall by 50% by next year, the bank said. <CNBC quoted Pierre Grameña, managing director of the European Stability Mechanism, as saying: “One thing I'm not overlooking is a crisis in real estate, both for individuals and in commercial real estate, where we see downward pressure in both the US and Europe.”
The office sector - a key component of the commercial real estate market - has also emerged as a focus of potential downturn concerns due to broader shifts toward remote or hybrid work patterns in the wake of the Covid pandemic, which has led to a decline in demand for offices.
<This has deepened concerns about which banks may be exposed to such risks, and whether the wave of forced sales could lead to a downward spiral. <According to Goldman Sachs, commercial real estate accounts for about 25% of US banks' loan books - a figure that rises to as much as 65% among smaller banks, the focus of recent stresses. That compares with about 9% among European banks.
<Amid this uncertainty, and what it described as stretched valuations, Capital Economics last month increased its forecast for the eurozone real estate sector's peak-to-trough correction from 12% to 20% downwards, with offices expected to perform at their worst. As of late 2022, European office vacancy rates stood at around 7%, well below the 19% in the U.S., according to real estate consultant JLL.
As of late 2022, European office vacancy rates stood at around 7%, well below the 19% in the U.S., according to real estate consultant JLL. <JPMorgan disagrees that there is a real estate crisis in Europe, saying late last month in a research note that fears of the U.S. economic downturn spreading to Europe are overblown, especially real estate. <Analysts at the bank said: "Fundamentally, we believe that any contagion from U.S. banks or commercial real estate in the U.S. to their European counterparts is unwarranted, given the different sector dynamics."
Analysts at the bank said.
