Falling Rates Provide Little Relief in Property Market Turmoil – By Reuters

By Tom Sims, Matt Tracy, John O’Donnell, and Iain Withers

NEW YORK/LONDON – Global property markets, experiencing turmoil due to the steepest interest rate increases seen in a generation, are not likely to find much relief from the gradual easing of borrowing costs. A return to the era of readily available cash that fueled a previous boom appears improbable.

The multi-trillion dollar real estate sector, which flourished after the global financial crisis when borrowing costs were slashed to zero, has become one of the hardest hit areas as central banks raised rates substantially.

Although central banks, including the European Central Bank and the Bank of England, are now cutting rates to lower borrowing costs, industry leaders and bankers do not foresee a swift recovery for an industry that expanded significantly when rates were near rock bottom. The influx of capital that benefited the sector is now flowing back to safer investments like bonds and traditional savings accounts.

"We’re not out of the woods yet," remarked Andrew Angeli, head of global real estate research at Zurich Insurance, suggesting that a rapid rebound for the property market remains unlikely.

The recent years of rising interest rates have led to numerous casualties, including firms like Signa, which owned prestigious properties in Germany, now leaving many projects unfinished and buildings unoccupied.

According to consultants, property insolvencies in Germany have been on the rise since early 2022, surpassing 1,100 in the first half of this year. Meanwhile, the construction industry in Britain has recorded the highest number of insolvencies across all sectors for two consecutive years, with around 4,300 cases reported in the 12 months leading up to June 2024.

The office market is particularly struggling, affected by escalating borrowing costs and the shift to remote work, but this downturn is also impacting the broader housing market, which has declined steadily in Germany and faced challenges in Britain.

"I’ve never worked so hard and feel like I have nothing to show for it," said Brian Walker, president of NAI Burns Scalo, a real estate firm in Pittsburgh. "Some might say we’re probably at the bottom of where the office market is, but I don’t understand how you can say that. We are starting to see many office buildings return to lenders."

Cornelius Riese, CEO of DZ Bank, one of Germany’s major property lenders, indicated that the effects of higher rates will take about three years to fully manifest. "We’re almost two-thirds through a phase where surprises can occur," he noted.

An economic slowdown in various countries, including Germany and China, is adding to the uncertainty.

HIGH STAKES

Real estate investment firm JLL estimates that approximately $2.1 trillion in commercial real estate debt worldwide will need repayment this year and next. In the first half of this year, nearly one-third of that amount was refinanced. However, JLL warns of a potential shortfall of up to $570 billion next year.

Many U.S. investors have returned office buildings to lenders, similar to what Brookfield Asset Management did with New York’s iconic Brill Building. Some smaller banks, which heavily invested in real estate during the boom, now face significant risks.

Rebel Cole, a finance professor at Florida Atlantic University, identified 62 smaller U.S. banks with excessive property loans, warning that a handful of lenders might be on the brink of collapse due to their investments in a stagnant property market while relying on deposits that could be withdrawn suddenly.

"There’s a significant amount of loan maturities lined up for next year," said David Aviram, co-founder of Maverick Real Estate Partners. This looming deadline is pushing banks to offload loans, but many have declined offers that fell to as low as 40% of the debt’s face value, opting to retain the troubled credits instead.

Selling properties has also become challenging. Earlier this year, a liquidator attempted to sell an office tower in London’s Canary Wharf for £160 million, which was a massive reduction of 60% from its previous price; however, the sale did not go through.

Some analysts believe banks may be in denial, as European regulators suspect they are downplaying the deteriorating quality of loans to the sector by overlooking falling prices.

Delaying action could exacerbate the situation, creating a growing gap between properties in desirable locations and those that are less attractive. In Los Angeles, for example, the Century City area surrounding Fox Studios is thriving, while large portions of downtown are in disarray, with numerous buildings facing foreclosure and significant amounts of space unoccupied, according to Jeffrey Williams, a New York-based investor.

In Sweden, which has been notably affected by the downturn, the recent rate cuts are providing a glimmer of hope. "It feels more positive when you believe that capital costs will be low and property prices might rise," commented Leiv Synnes, CEO of SBB, one of the country’s largest vulnerable firms. "The mood is entirely different now."