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European Real Estate’s Decade-Long Party Is Coming to an End



(Bloomberg) — Deutsche Bank AG’s gleaming new London headquarters was a sought-after asset in February, attracting bids of close to £1 billion ($1.1 billion), but then came Russia’s war in Ukraine.

The invasion caused energy and food prices to skyrocket, prompting central banks to unleash their most aggressive round of monetary tightening this century and threatening the foundations of Europe’s decade-long real estate boom. With a funding gap looming, landlords could turn into distressed sellers.

Public markets have been sounding the alarm on property for months, with the Stoxx 600 Real Estate Index plunging over 40% this year and touching valuations that haven’t seen since the global financial crisis. But with much of real estate trading hands privately, the true impact of the end of the cheap-money era has been slow to emerge, until now.

Land Securities Group Plc, the developer of the 16-story building that will house Deutsche Bank’s London staff from early next year, finally sealed the sale last month, accepting a price about 15% lower than initial offers made just before Russia attacked Ukraine.

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The deal marks a rare signpost of the pain facing Europe’s once-hot property markets and stands out because many sellers aren’t even testing the market.

Planned sales of trophy buildings like Bank of America’s London headquarters next to St Paul’s Cathedral have been canceled, meaning there’s few deals on which to judge the new realities. Overall, about £6 billion of London office stock was withdrawn from sale, broker CBRE Group Inc. estimates.

“Currently we have the dance-floor situation, with buyers and sellers on either side and no one wants to get in the middle and dance,” Ian Rickwood, founder of real estate private equity firm Henley Investment Management said.

That could soon change as companies seeking to refinance find borrowing costs have skyrocketed. For some, debt markets are effectively closed, and there might not be enough money available to repay all the loans coming due.

Hans Vrensen, head of research and strategy at AEW Capital Management LP, calculates a potential refinancing gap of €24 billion ($23.5 billion) over the next three years on borrowings secured against UK, German and French real estate.

“All this will inevitably lead to forced sales amongst commercial and residential property owners,” said Nicole Lux, senior research felllow at Bayes Business School who compiles a bi-annual report on British real estate lending. The shift “will play strongly into the hands of capital-rich investors who can pick up a bargain.”

Vonovia SE appears to be kicking off the trend. Europe’s biggest public landlord plans to sell more than €13 billion of assets to bring down debt after the cost of borrowing exploded and its share price collapsed.

Other property companies that loaded up on cheap credit — including Aroundtown SA, Adler Group SA and Sweden’s SBB — are also looking to shed assets before loans mature.

Debt markets are key for real estate. The world’s biggest asset class generally tracks what investors earn on government debt — offering a slight premium given the higher risk.

During years of negative interest rates, buyers were willing to accept minimal returns on their investments. But interest rates are rising, and even rock-solid German 10-year bund yields have climbed by about 2.3 percentage points this year.

That pressure is filtering through property markets. The London Deutsche Bank deal suggests prime London office yields have moved to about 4.7% from 4%, according to Bloomberg Intelligence analyst Sue Munden. UBS Group AG’s London headquarters, 5 Broadgate, had a 3.6% yield when it sold last December.

The situation in continental Europe will be far worse as yields there continued to compress over the past five years, while Brexit kept London prices largely in check.

That’s worrying for property companies, because even small changes have an out-sized impact on valuations when yields are so low. For instance, a building with $10 million in rental income would be worth $100 million less if the yield shifts to 2.5% from 2%, a much larger impact than when yields are closer to historic norms. That means balance sheets risk getting wobbly if assets get marked down.

So far landlords insist valuations are holding up, with Vonovia recently reassuring investors that book values for the third quarter will likely be stable or up. The optimism suggests that appraisers are “even more behind the curve than we thought possible,” real estate research firm Green Street said in a note.

Rent increases could be a way to prop up valuations, but with painful recessions looming across the region and costs soaring, businesses and consumers are already strapped. In Germany, more than 10% of households were already overburdened by housing expenses last year, which was before inflation really took off.

To be sure, property fundamentals still look solid. Demand for new space is strong, vacancies are mostly low and inflation is likely to keep a lid on new supply by deterring construction. Savills Plc estimates that more than 40% of London office projects that were due to be built by 2026 are delayed — some by more than a year.

And except for some outliers, debt levels at property companies are modest compared with the pre-financial crisis excess.

“Historically, downturns in the real estate market have been driven by one of two things: too much debt in the system or too many cranes,” said James Seppala, head of real estate in Europe at private equity giant Blackstone Inc. “We have neither today.”

That upbeat view hasn’t stopped the real estate rout. Share prices have fallen so much that it implies the value of the portfolios of the continent’s largest landlords are set to fall by more than 39%, according to calculations by Bloomberg Intelligence.

If public markets are right, a crash of that magnitude would trigger a wave of foreclosures on a scale not seen since the global financial crisis.

“I would trust the signal from the capital markets in terms of where we are going, more than I would the data on rents, occupancy and take-up,” said Peter Papadakos, head of European research at Green Street.

The structure of Europe’s real estate debt markets has also shifted markedly over the past 10 years, posing new headaches compared to the last crash. The European Central Bank’s asset-purchasing program helped make it more attractive for landlords to sell bonds instead of using secured mortgage loans to finance their properties.

Real estate companies have around €80 billion worth of bonds coming due in the next three years, according to data compiled by Bloomberg. The securities have sold off sharply this year as investors fret about rising funding costs, meaning new issuance has all but dried up.

With bond markets no longer easily accessible, property companies need alternative sources of financing, but banks are likely to be wary after spending a decade reducing their exposure after the last crash.

“I suspect the last thing the banks want is to take all that back on the balance sheet,” said Mike Sales, chief executive officer of Nuveen Real Assets. “There isn’t too much leverage yet, but that can quickly move up if yields move out.”

Even if banks extend more financing, it won’t come cheap. As of the end of June, the combination of higher interest rates from central banks and rising costs to hedge real estate loans had driven all-in costs for borrowers in the UK, Germany and France to double their level nine months earlier, according to a report by AEW. The volatility unleashed by the UK’s recent tax cuts has seen them spike even higher.

Even if landlords are holding firm for now, the financing pressure risks eventually pushing more companies to use property sales to drum up cash and then a trickle becomes a flood.

That could make the deal for the Deutsche Bank building — which sold for about £140 million below original bids — look good.

“The challenge right now is that you have so many different challenges,” from inflation and interest rates to foreign-exchange volatility and political extremism, Henning Koch, CEO of Commerz Real AG, said in an interview on Tuesday at the Expo Real conference in Munich. “That makes it really difficult to drive your company in the right direction.”


©2022 Bloomberg L.P.

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Swedish Real-Estate Companies Face Risk of More Downgrades at Moody’s – BNN Bloomberg



(Bloomberg) — The pain in the Swedish property sector is about to spread further, as more companies face the risk of downgrades spurred by their deteriorating debt profiles, according to credit-rating company Moody’s Investors Service.

Rising inflation and higher funding costs are hurting real-estate companies, whose debt-driven growth strategies are fast becoming unprofitable, or unfeasible, when refinancing options dry up. Moody’s, which has already cut the rating of Castellum AB and lowered the rating outlooks on the debt of Fastighets AB Balder and Fabege AB, said it expects more “negative rating actions” to come as companies’ ability to service their debt is eroded.

The firms most exposed to negative actions would be those with “low-yielding assets, significant refinancing needs and a low degree of hedges,” Moody’s Senior Credit Officer Maria Gillholm said in an interview, adding that such assets are found within Stockholm’s central business district and residential properties.

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Nordic property firms “are very vulnerable to higher interest rates” and need to refinance almost 300 billion kronor ($29 billion) of bonds in the next two years, according to a Moody’s report published on Tuesday. But for some, the credit market won’t be an option as financing costs are likely to be too high. Banks are expected to absorb a share of that lending — but not all — and they will probably focus on those with the strongest finances, the rating company said.

“The banking sector clearly has the technical capacity to take basically everyone on board if you look at the next couple of years,” Senior Credit Officer Louise Welin said. “But they will be selective and only lend to companies with good creditworthiness.”

Michael Johansson, a real estate analyst with Arctic Securities, said the refinancing next year should be “relatively smooth” for larger firms, but that the problems will be more visible in the following two years. Some smaller companies will see their fate determined in negotiations with bondholders, if they don’t take action to secure financing, he he said via a text message.

The situation is more acute in Sweden, Moody’s said, because the sector is much larger there than it is in Finland or Norway. Many of the landlords will also face difficulties in lifting rents in tandem with inflation as tenants may be struggling, Moody’s said in the report. 

And while most Nordic real-estate firms have enough liquidity to cover bond maturities for the coming year-and-a-half, those resources are set to dwindle as companies await re-entry to the bond market, it said.

The rating firm doesn’t expect the Riksbank, which during the pandemic bought 7.1 billion of real estate bonds, to come to the sector’s aid again unless its refinancing problems threaten broader financial stability. 

On a conference hosted by Moody’s on Tuesday the Swedish central bank’s Deputy Governor Martin Floden said that the sector is unlikely to need support from the Riksbank, and that propping up companies that are unable to deal with current borrowing costs would make little sense.

“Sure, we have raised rates rapidly in a short period of time but the policy rate is still at 2.5%,” Floden said. “That is a low level and companies that can’t handle a rate at 2.5% maybe shouldn’t exist.”

The Riksbank and Sweden’s Financial Supervisory Authority have repeatedly warned of the risks stemming from commercial property debt. Anders Kvist, a senior adviser to the director of the FSA, recently said that falling real-estate values could trigger a “domino effect,” as demands for more collateral could force distressed selling. 

Moody’s said that valuations could come down by about 10% on average, varying by asset type, quality and location. It sees residential, shopping centers and logistics properties declining before office real estate. Increased revenues from indexed rents and finished projects could offset some of the negative effects, Gillholm said.  

–With assistance from Abhinav Ramnarayan and Niclas Rolander.

(Updates with chart and comments from sixth paragraph.)

©2022 Bloomberg L.P.

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Toronto real estate: Average home prices now down 5.5 per cent from last year after another monthly decline – CP24



The average selling price of a Toronto home decreased by roughly $10,000 last month as the increased cost of borrowing continued to weigh on the city’s real estate market.

The latest data from the Toronto Region Real Estate Board (TRREB) shows that the average resale price across all property types was $1,079, 398 in November, compared to $1,089,428 in October.

Home prices in Toronto have now fallen by an average of 5.5 per cent compared to November 2021, however TRREB points out that the declines have been more pronounced in the “more expensive market segments,” such as detached (11.3 per cent) and semi-detached homes (13.9 per cent).

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The condo market has proven to be more resilient with resale values down only 0.9 per cent on average, compared to this time last year.

In a news release, TREEB President Kevin Crigger said that while increased borrowing costs represent a “a short-term shock to the housing market,” he still anticipates that the demand for housing will “pick up strongly” over the medium and long term, largely due to increased immigration.

“The long-term problem for policymakers will not be inflation and borrowing costs, but rather ensuring we have enough housing to accommodate population growth,” he said.

The Bank of Canada has now increased its key lending rate six consecutive times, lifting it from a historic low to its highest point since 2008.

That, in turn, has put pressure on Toronto’s real estate market with at least one major bank suggesting that a ‘historic correction’ is now afoot.

The latest data from TRREB does show that new listings were down 11.6 per cent from November, 2021, providing some support to prices.

However, sales were down a staggering 49.4 per cent from November 2021.

That is after a similar 49 per cent decrease in transactions in October.

In its release, TRREB said that the market is continuing to be “influenced by the impact of higher borrowing costs on affordability.”

But it said that prices have essentially “flatlined” since the summer.

“Selling prices declined from the early year peak as market conditions became more balanced and homebuyers have sought to mitigate the impact of higher borrowing costs. With that being said, the marked downward price trend experienced in the spring has come to an end,” TRREB Chief Market Analyst Jason Mercer said.

The average price of a Toronto home across all property types peaked at $1,334,062 last February before plunging to a recent low of $1,073,242 by July.

TRREB says that the average selling price for a detached home fell to $1,390,162 in November while condominium units changed hands for an average price of $708,636.

A report released by Re/Max last week suggested that average residential sale prices are expected to drop another 11.8 per cent in the GTA in 2023.

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Latest real estate numbers for Delta, BC – Delta Optimist



Things are lagging more than usual when it comes to real estate activity in Delta and the Lower Mainland.

The Real Estate Board of Greater Vancouver (REBGV) says that while November is typically a quiet month of market activity based on seasonal patterns, last month’s home sale and listing totals lagged below the region’s long-term averages.

The REBGV reports that residential home sales in the region last month saw a 52.9 per cent decrease from the sales recorded in November 2021, and a 15.2 per cent decrease from the homes sold in October 2022.

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Last month’s sales were also 36.9 per cent below the 10-year November sales average.

According the REBGV, the benchmark price for a single-detached house in Ladner last month was $1,298,700, down 1.4 per cent from the previous month while down 3.6 per cent from November 2021.

The benchmark price for a Tsawwassen detached house last month was $1,464,800, down 4.6 per cent from the previous month while down 2.5 per cent from November 2021.

The REBGV also notes the benchmark price from a townhouse in Ladner in November 2022 was $909,900, down 3.4 per cent from November 2021. The benchmark price for a Tsawwassen townhouse last month was $925,500, down 4.1 per cent from November 2021.

The benchmark price for a Ladner condo last month was $699,400, which is up 10.9 per cent from the same time last year, while a Tsawwassen condo was $718,200, which is up nine per cent from the same time last year.

Meanwhile, the Fraser Valley Real Estate Board (FVRB) says that with sales this November were down almost seven per cent from October, and new listings were off by more than 20 per cent, the Fraser Valley housing market continues its slowing trend heading into the holiday season.

However, despite the market slowdown, opportunities are available, as evidenced by brisk turnover time frames.

According to the FVRB, the benchmark price for a single-detached house in North Delta last month was $1,272,600, down 10.3 per cent compared to November 2021.

The benchmark price for a North Delta townhouse last month was $827,900, down 2.1 per cent from the same time last year. The benchmark price for a North condo last month was $544,000, up almost seven per cent compared to November 2021.

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