(Bloomberg) — Bankruptcies, bad debts and falling values. The past year has been an endless symbol of Europe's real estate crisis. There was a shortage of yachts in Cannes this week.
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At Europe's biggest real estate conference, the number of sponsored boats was a fraction of what it was in previous years, when ultra-low interest rates meant big profits and an even bigger party on the Riviera. The mood at MIPIM has become more sombre this week in the shadow of a market decline following a sharp rise in borrowing costs.
Still, amidst the rubble of a fallen empire and a sea of worsening debt, the eternally optimistic businesspeople in attendance showed some defiance. Many people argued that the delayed construction work was a sign of recovery.
Rising costs, plummeting selling prices, and prohibitively expensive, if possible, debt financing are shrinking development pipelines and creating a situation of supply shortage. Optimists argue that if the fabled economic soft landing were to work, where would the growing businesses and population be based if nothing was built for several years?
This is a big decision given that the system is still functioning despite the impact of rising borrowing costs. Even if the shortage theory were to become reality, we would only expect selective benefits, such as higher-quality office buildings in prime locations.
The ideal development plan, says Dean Shapiro, head of global development at Oxford Properties, is to build in a bad market and hope for a good market in the future when you're ready to sell. is.
“If you can build it cheaply, it will work,” he says. “The problem now is that construction costs are still very high and credit costs are also high, so we don't have the same opportunities, but supply shortages are bound to happen. It's not a bad time to take a risk. ”
In Europe, Goldman Sachs Group Inc. announced this week that commercial real estate valuations are nearing rock bottom. Blackstone President John Gray told Bloomberg TV that the time has come to buy real estate. They're not alone in seeing price declines moderating or stopping altogether. This view supports earlier optimism fueled by expectations that the central bank would cut interest rates before the end of the year.
And when the market recovers, there will be a tight supply and demand situation.
“I think prime offices are definitely going to be in short supply,” said Isabelle Simama, global head of AXA IM Alts. “And on the housing side, every major city is suffering from a lack of supply.”
Take Germany's struggling office market, for example. There, the six largest bankrupt developers have a total of 48 projects, totaling approximately 1 million square meters (11 million square feet). Two-thirds of those have since been suspended or abandoned, according to data from Colliers International.
And the development pipeline is shrinking as funding for these projects dries up and potential buyers look to make them viable.
An analysis of Europe's listed office landlords by researcher Green Street found that planning remains at about half the level reached in 2019. The situation is similar in warehouse development, where land prices have been hit particularly hard.
But perhaps the greatest opportunity lies in the supply of new housing. Last year, housing construction suffered across the continent. London has the lowest number of new housing starts in more than a decade, and cities in Germany, France and Sweden are enduring a slump in building permits.
But in all these regions, governments are keen to ease shortages and investors see opportunities for new rentals, if they exist.
“It feels like we're approaching a tipping point in the market,” said Mark Alnutt, executive director of Greystar Real Estate Partners, a private equity firm specializing in rental properties. “With interest rates peaking and the Bank of England likely to cut rates before the general election, investors are now scrambling to get things started.”
However, it is not yet clear whether the recession is nearing an end.
Shares in Vonovia SE, Germany's largest landlord with about 546,000 apartments, plunged almost 11% on Friday. Last year, the value of the portfolio fell by more than €10.7 billion, pushing relative debt above the target range. However, the rate of decline has slowed, with write-downs in the second half of the year at 4.2%, lower than the 6.6% decline recorded in the first half.
German real estate company LEG Immobilian said earlier this week that “the peak of the real estate crisis is already over.” But the next day, I received a message from another company, TAG Imbilien:
“It remains a difficult question to answer: What is the current value of residential real estate in Germany?” “The trading market is giving us little information. Trading volumes have been too subdued in recent quarters. This uncertainty will probably continue for some time to come.”
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