The European real estate sector is enduring a period of turbulence not seen since the 2008 financial crisis. Industry players are dealing with a confluence of stubbornly high interest rates, falling valuations, rising energy and construction costs, and increasingly expensive financing.
Mounting debt piles are putting real estate firms under intense pressure across the continent. As repayment deadlines loom, and with credit increasingly scarce, many may turn to asset sales to free up much-needed liquidity.
Hitting the maturity wall
The impending debt maturity wall in Europe’s real estate sector is causing real concern among businesses and investors alike. Property companies are due to pay an estimated US$165 billion on maturing bonds through 2026.
Combined with falling valuations, particularly in the office and retail sectors, the impending maturities are expected to prompt a string of defaults as highly leveraged businesses find themselves unable to pay back debt.
Businesses that are unable to repay or refinance their debt by the rapidly approaching deadlines will be looking to exit, and selling assets on the distressed market will be the next logical step.
Mounting debt prompts wave of disposals
This trend has already begun to play out with some European real estate companies that are looking for ways to stay afloat. Many of them amassed high levels of debt during the more supportive financing climate that arose in response to the pandemic-induced economic downturn.
Frankfurt-listed property firm Aroundtown, for instance, has seen its stock market valuation drop 70 percent over the past two years amid rising interest rates, amassing an estimated US$21 billion in debt. The firm has accelerated its asset sales in an attempt to turn things around, putting its Center Parcs resorts in Germany, Belgium and the Netherlands on the market, as well as a stake in listed residential landlord Grand City Properties. In September, Austrian real estate investor Georg Stumpf announced he had acquired a 10 percent stake in Aroundtown.
Asset managers bet on troubled Swedish real estate
Swedish property company SBB, meanwhile, has been seeking opportunities to sell assets over the past year. The business divested a 49 percent stake in its property portfolio to Brookfield Asset Management for an estimated US$983 million at the end of 2022. SBB is also reportedly looking to sell either a minority or controlling stake in its residential property arm, in a further attempt to renovate its balance sheet.
SBB, which Fitch Ratings downgraded to junk status in August—a significant downgrade of five steps—is just one of several previously investment-grade real estate companies to be demoted amid Europe’s ongoing property crisis. FastPartner is another Swedish real estate firm recently cut to junk, this time by Moody’s. Businesses downgraded to junk status will find it harder to refinance their debt, and as a result will more likely look to dispose of underperforming assets.
In another opportunistic purchase by a major asset manager, Blackstone agreed to acquire a portfolio of warehouses from Swedish property landlord Corem for US$521 million. Dealmakers will likely extend their hunt for assets elsewhere across the continent as Europe’s property crisis takes hold.
Distressed office assets seek exit route
European office developers were already feeling the squeeze due to post-pandemic working practices, before the onset of high inflation. Now, the rising cost of financing is putting Europe’s office spaces under even greater threat, posing a concern for both banks and investors. In addition, new EU and UK regulations for energy-efficient buildings are making older buildings an even more expensive proposition.
The challenge has been too much for some, particularly in the UK, where more than 100 million square feet of office space stands vacant—a 65 percent increase from March 2020 and the highest level in nine years. This is leading to discounted office sales for those willing to take on the risk, such as UK-based real estate investor Praxis. Having already invested £400 million in the UK’s office sector, the company has said it intends to invest a further £1 billion.
Is the risk worth the reward?
While European distressed real estate assets will be sold at favorable prices, perhaps the real question is whether investors believe they will see a return on their investment.
Some analysts have predicted that, given the potential impact of persistently high interest rates, European real estate values may decline by a further 40 percent by the end of 2024. Such pricing volatility could lead to a major mismatch between buyer and seller expectations.
While it is not certain when the European real estate industry will see a change in fortune, those willing to take on the risk will be the first to reap any potential reward.
