Office properties are just recovering from the corona pandemic, but now those who have invested in them are threatened by a rise in interest rates, reports the Financial Times.
Finnish company Sponda’s defaulted loan caused concern about the state of the European real estate market in March, but it is only one early sign of difficulties for investors specializing in office real estate.
The international financial media reported last month largely because the American Blackstone failed to pay a bond secured by Sponda’s properties in Finland.
In addition to the Finnish market, the British financial magazine Financial Times (FT) by Recently, there has been news about real estate investors’ problems. In Germany, Korean investors have started the restructuring process for a 375 million euro loan secured by a 45-story tower block in Frankfurt.
Credit rating agency Moody’s, on the other hand, lowered the credit rating of Canadian Brookfield’s loans in March. The loan is secured by apartment buildings in Germany.
A Chinese investor in Britain Cheung Kei has again put two office buildings up for sale in order to reduce its debt burden, according to the news agency Bloomberg.
Cases are individual examples, but for example the European Central Bank warned in its February report about the vulnerabilities of the European real estate market.
The real estate sector is just recovering from the changes caused by the corona pandemic and the spread of remote work in the office market, but now it is threatened by a rise in interest rates. Real estate projects are typically financed with debt.
According to FT, the American bank Citi warned its clients last month that the market values of European real estate have not yet adjusted to the rise in interest rates. Citi estimates that real estate prices may fall by up to 40 percent by the end of next year.
Multi the analyst still estimates that a repeat of the financial crisis is now unlikely. During the financial crisis, banks’ capital was weakened by the fall in the value of collateral for real estate loans. Instead of a quick and sharp price shock, analysts predict a long-lasting period during which prices will adjust painfully for market participants.
Forecasting development costs is made difficult by the fact that the real estate market has changed in many ways since the financial crisis. The market has more borrowers and capital and a lower lending rate. These reduce the possibility of a sharp price shock.
Before the financial crisis of 2008, banks gave property-secured loans, the value of which was typically 80-100 percent of the value of the building. According to a study by the University of London, the lending rate now rarely rises above 60 percent, FT says.
On the other hand, there is a significant difference in loan costs between 2008 and today. While during the financial crisis the central banks pushed the interest rate down with their monetary policy measures, now the central banks are raising interest rates due to rapid inflation.
Stateside the slower-than-expected return of employees from remote work to offices has made it difficult to finance even the best rated office properties.
According to real estate consultant JLL, the share of rentable premises in the total stock in the United States was 19 percent at the end of last year. In Europe it was half that.
In Europe, the market is differentiated by the demand for energy-efficient office spaces. According to FT, real estate prices in continental Europe also typically adapt to changes more slowly than in the United States or Britain.
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