The brick in crisis threatens banks and investors


By John

Caught between the rock of high rates and the hammer of the structural decline in demand, the commercial real estate sector – offices and shops – is going through a profound global crisis, which is generating losses among investors and disturbing the sleep of banks and financiers. Retail investors withdrew one billion euros a month from European real estate funds during 2023, with net outflows for 11 consecutive months, Bloomberg reports citing Morningstar data, while total assets held by mutual funds and real estate ETFs fell by more than 10%, to 180.7 billion euros. The flight forces the funds to accelerate the sale of the properties in which they have invested, with the effect of recording heavy losses or having to freeze exit requests. «And this pressure is more acute in Europe where mutual funds dominate the real estate fund scene», he notes Oliver SalmonSavills capital markets researcher.

“The office market is experiencing an existential crisis” and “will never recover” from the paradigm shift imposed by the pandemic, warned Barry Sternlicht, founder and CEO of Starwood Capital, an investment company focused on real estate that manages 115 billion dollars of assets. An industry once valued at $3 trillion has lost more than a third of its value and is now “probably worth $1.8 trillion.” Smart working and online shopping, together with high rates, are causing a perfect storm on offices and shops: falling demand, rising financing costs, falling valuations and yields. As demonstrated by the insolvencies of Evergrande, emblem of the Chinese real estate crisis, and Signa, the crumbling empire of the Austrian real estate developer René Benko. The risk is that losses could travel back into the economic system and infect banks. According to Trepp, an information provider specializing in real estate, the commercial sector will have to repay $2.8 trillion in debt by 2028, of which $1.1 trillion between this year and 2025, half of which goes to banks.

“With lower property values ​​and higher interest rates, lenders and borrowers will have difficulty rolling over maturing loan volumes,” says analyst Emily Yue. The first creaks came between the end of January and the beginning of February: New York Community Bancorp recorded 552 million dollars in losses on real estate loans, followed by the Japanese Aozora Bank, in the red for its exposure to US commercial real estate. Dangers are also very present at the ECB which, in its supervisory priorities, has recalled the risks connected to the crisis in the commercial sector and has pointed the finger at the “overvaluation” of real estate guarantees by the banks. Mistakes that the sheriffs of Frankfurt could correct with an increase in capital requirements for those banks that do not manage risks correctly.