Europe’s real estate sector is undergoing its most turbulent period since the 2008 financial crisis. Industry players are grappling with a combination of persistently high interest rates, falling valuations, rising energy and construction costs, and increasingly expensive financing.
Rising debt piles are putting real estate companies under intense pressure across the continent. As repayment deadlines approach and credit becomes increasingly scarce, many may turn to asset sales to secure needed liquidity.
hit a maturity wall
The impending debt maturity wall for Europe’s real estate sector is causing major concerns among companies and investors alike. The real estate company will pay an estimated US$165 billion for bonds maturing by 2026.
Combined with falling valuations, particularly in the office and retail sectors, the impending maturities are expected to lead to a spate of defaults as highly leveraged companies become unable to repay their debts.
Companies that cannot repay or refinance their debts by fast-approaching deadlines will consider exiting, and selling assets in a distressed market will be the next logical step.
Rising debt prompts wave of disposals
This trend is already starting to appear in some European real estate companies that are looking for ways to stay afloat. Many took on large amounts of debt when the financing environment created in the wake of the pandemic economic downturn became more supportive.
For example, Frankfurt-listed real estate company Around Town has seen its stock market valuation fall 70% in the past two years due to rising interest rates and is saddled with an estimated $21 billion in debt. The company has accelerated asset sales to turn things around, putting its Center Parcs resorts in Germany, Belgium and the Netherlands on the market, as well as selling its stake in listed residential landlord Grand City Properties. In September, Austrian real estate investor Georg Stumpf announced that he had acquired a 10% stake in Around Town.
Asset managers bet on troubled Swedish real estate
Meanwhile, Swedish real estate company SBB has been exploring opportunities to sell assets over the past year. The business sold a 49 per cent stake in its real estate portfolio to Brookfield Asset Management at the end of 2022 for an estimated USD 983 million. SBB is also reportedly considering selling either a minority or controlling stake in its residential real estate division in a further move. This is to revamp the balance sheet.
SBB, which was downgraded to junk rating by Fitch Ratings in August (a significant downgrade of five notches), is among several real estate companies that were previously investment grade before being downgraded amid Europe’s ongoing real estate crisis. It’s just one company. Fast Partner is also a Swedish real estate company that was recently scrapped by Moody’s. Companies downgraded to junk status have difficulty refinancing their debt and are therefore more likely to consider disposing of unprofitable assets.
In another opportunistic acquisition by a major asset manager, Blackstone has agreed to acquire a portfolio of warehouses from Swedish real estate landlord Korem for US$521 million. As Europe’s real estate crisis takes hold, traders are likely to expand their search for assets in other parts of the continent.
Troubled office assets seek exit
European office developers were already feeling the strain of post-pandemic labor practices even before high inflation began. European office space is now under even greater threat due to rising financing costs, causing concern for banks and investors alike. Additionally, new EU and UK regulations on energy efficient buildings are making older buildings even more expensive.
For some, particularly in the UK, more than 100 million square feet of office space remains vacant, an increase of 65 per cent since March 2020 and the highest level in nine years. This allows offices to be sold at a discount to companies willing to take on the risk, such as UK-based real estate investor Praxis. The company has already invested £400m in its UK office sector and said it would invest a further £1bn.
Is the risk worth the reward?
European distressed real estate assets will sell at favorable prices, but perhaps the real question is whether investors believe they will get a return on their investment.
Some analysts predict that European real estate values could fall by a further 40% by the end of 2024, given the potential impact of continued high interest rates. Such price fluctuations can cause large mismatches between buyer and seller expectations.
It is unclear when the fortunes of Europe’s real estate industry will change, but those willing to take on the risks will be the first to reap the potential rewards.