European commercial property needs new loans
European commercial property, like markets elsewhere, is struggling. Despite optimistic investor sentiment, the problem of loan defaults remains unresolved.
The mood in the financial markets has improved considerably since the beginning of the year. The reason for this is talk of a possible interest rate cut. However, the European central banks have not yet taken decisive steps. At the same time, tensions in the real estate sector due to rapidly rising interest rates have not abated. This has affected the commercial sector in particular. The increase in borrowing costs has led to a collapse in property prices. The situation is less critical in Europe than in the US, but there is still room for improvement.
Analysts cite growing investor confidence as a positive factor in the current state of the commercial property sector. The impetus for this was:
– shares of companies in the industry have risen 20% since November 2023, although they are still below their highs;
– the rise in the sector has coincided with a fall in government bonds;
– 15-year bond yields fell by 70bp over the same period.
This has led to optimism in the financial markets, although experts are in no hurry to jump to conclusions.
Office property remains one of the biggest challenges for the sector in the US and Europe. The popularity of remote working has contributed to decreased demand for space. The US market is the following:
– tenants require 15-20% less space at current trends;
– in 2023, vacancy rates in the US office sector were the highest since the 1970s;
– according to Moody’s, around 20% of space was vacant in Q4.
The situation in Europe is slightly better. According to Savills, the office vacancy rate was 6.9% in Q3. This is much lower than during the crisis. However, one threat to the market was the bankruptcy of luxury property company Signa. The company’s collapse shook an already unstable market. It showed the sector all the risks of excessive leverage resulting from low-interest rates.
The European commercial property market’s main problem
At the moment, experts say that refinancing is the biggest problem facing the European commercial property sector. This sector needs new loans for around 10% of its 300 billion euro debt. And we are talking about companies traded on the stock exchange. For other companies, refinancing reaches 200 billion euros a year.
Northern Europe is the leader in terms of debt. Roundtown in Germany and Castellum in Sweden have high levels of debt. Experts expect these and several other companies to be in serious need of funding.