Global Property Markets deal with $175 billion in debt

(Bloomberg) — The slump has spread through the world’s biggest asset classes from the housing market to commercial real estate, threatening to trigger a wave of debt defaults. crisis in the economy.

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Nearly $175 billion of real estate debt is already in trouble, according to data compiled by Bloomberg – about four times more than the next major industry. As the amount rises from high interest rates and the end of easy money, many real estate markets are almost frozen and some say are lending money to borrowers who sell assets or maintain risk amid demands for additional funds from property owners.

The level of stress in European real estate is the highest in ten years, in part due to reduced spending, according to a study by the law firm Weil, Gotshal & Manges. British commercial property prices fell by more than 20% in the second half of 2022, MSCI Inc. said. In the US, the drop was 9%, according to Green Street.

The fall in trade and development in the commercial and residential sectors will certainly affect spending in the real economy. On the other hand, there may be a risk to jobs and growth.

“What we have in this recession is a unique set of economic conditions. Interest rates are tightening rather than easing the pressure for housing and other commercial companies,” said Ian Guthrie, senior managing director in the mortgage advisory group at Jones Lang LaSalle Inc., an investor. business. “You have a pipeline of non-performing loans” that “are under cost pressure and under cash pressure.”

This year, he added, “those problems will begin to appear.” About one in 10 loan companies in Europe are already bad and show growing credit problems, according to JLL.

The sudden halt to more than a decade of easy money has made it even worse for property companies as a pandemic has changed the way people work and live, leaving many real estate businesses high and dry. .

The effects are being felt around the world. Real estate group Brookfield warned in November that it may struggle to repay debt on two towers in downtown Los Angeles, raising the prospect of foreclosure, analysts at Barclays Plc said. “relevant” for the market. The default of the developer of the theme park Legoland Korea caused a debt crisis in the country, with the central bank working to stabilize the market. Australia’s Caydon Property Group Ltd. Covid lockdowns and rising interest rates were blamed for the fall in sales.

“We expect to see some shocks” among British developers, said Nicole Lux, who studies mortgage loans at Bayes Business School. “There will be fireworks.”

Commercial properties – from offices to shops – are more sensitive to economic conditions than other asset classes, said Andreas Dombret, who served on the board of Germany’s Bundesbank and the Bank for International Settlements, adding “in the past, when there was a bubble. Bar, usually this was related to commercial real estate.”

“But it is very difficult to spoil the party,” added Dombret. “This is why regulators often shy away from introducing mortgages at the right time: when there is no disruption in the real estate market.”

It is beginning to spread to the general economy. US construction company Builders FirstSource has cut 2,600 jobs, while UK millennial favorite has gone bankrupt. Swedish appliance maker Electrolux AB has announced plans to lay off up to 4,000 jobs last year, most of them in the United States. North.

The signs of a recession are growing in the US. But despite the decline, real estate prices “are still very high,” said Michael Knott, head of US REIT Research at Green Street, who expects another 5% in the 10% drop this year. “Researchers are behind, business activity has slowed down a lot.”

Some American banks have predicted that losses will increase this year. In its fourth-quarter results, Bank of America Corp. announced the addition of $1 billion in agency loans with an increase in delinquencies or missed payments, while Wells Fargo & Co. more stress is expected to arise in that market as demand weakens.

The change has come so quickly that some private lenders are struggling with funding, said Tom Capasse, chief executive of real estate investment firm Ready Capital Corp., adding that he is looking the company “buys other people’s problems,” including construction. loan

“We are in a systematic bear market” where “banks are trimming their deposits,” he added.

‘Two fires at once’

Disadvantages in commercial real estate are expected to exist on all sides of the market: old buildings that have been vacated, and unfinished developments. . Nowhere has the latter been experienced more than China. In September, the construction of about 2 million houses was stopped because the property market was slow.

Project delays in China are being watched closely by everyone from investors to distressed creditors amid a nationwide sell-off and massive mortgage boycotts. It followed the intervention of the government in the industry in 2020 which tried to reduce the use of developers, reduce the cost of housing and reduce the risk in the financial sector.

Beijing has changed its policy in recent weeks and may allow housing companies to raise more debt as part of the easing of restrictions. It comes a few months after the International Monetary Fund warned of the risk of major setbacks to China’s housing developers – starved of water – as they struggle to complete projects under construction.

In an interview with Bloomberg this week, Harvard University professor Kenneth Rogoff said “there is no rush” for commercial real estate overdevelopment in parts of China.

The China Evergrande Group, which defaulted on its debt last year, is showing the tension. One of his Hong Kong projects was sold by buyers after the recession, with the developer planning to lose about $770 million on the transaction. The company proposed a restructuring plan this week after missing some self-imposed deadlines.

There are also problems outside of the country’s business community. The first phase of the Royal Albert Dock project near London City Airport – previously touted as a new business district that could rival Canary Wharf – was put up for sale last year since the Chinese owner of the place fell.

“The end of Covid Zero in China has left the economy especially vulnerable,” wrote David Qu in Bloomberg Economics. “Perhaps it played a role at the time of the fact that it was a lifeline for developers. Maybe the Government did not like to have two fires at the same time.”

Read more: How China’s property developers got into such trouble

Rogoff, along with fellow economist Yuanchen Yang, estimated in 2020 that China’s real estate industry contributed about 29% of the country’s GDP. That’s the same as Ireland before the last recession, they wrote.

Ireland became a child of that crisis, falling into a recession when the stock market crashed. Since then, housing prices in Dublin have recovered but private investors are preparing to put some land on the market, according to people familiar with the matter. Some of those who sold will be forced to borrow money, people said.

After many bailouts during the financial crisis, lenders in Europe have been more cautious in the current cycle, lending below the debt rather than reaching 2008, said Peter Cosmetatos, CEO at the Commercial Real Estate Finance Council Europe, a trade group for financiers.

“There is no doubt that there will be a lot of suffering and pain in the real estate market,” but borrowers will feel it more because the lenders have a big cushion before they making losses, he said. “It’s a healthy problem to the extent that it doesn’t come from or seriously affect the financial sector.”

Impaired Assets

The trap of cheap debt is what caused landlords to load up on debt after the financial crisis, and build up portfolios where the cost of borrowing is lower than the yield. Real estate is left as the weakest link in the European market, with a decline in the next two years of almost 8%, according to Bloomberg analysis. Directors have already warned that low demand for jobs since the pandemic, high prices from supply delays and rising borrowing costs will make it impossible. use some projects in Europe.

And with fewer buyers in the market, many European property owners will have to mark down prices, according to two investors who asked not to be identified. In Sweden, where housing prices are in free fall, Samhallsbyggnadsbolaget in Norden AB has agreed to sell properties worth $1 billion to pay off debts, a sign that people are moving Landlords in the country reduce leverage.

A similar situation is playing out in the US where lenders are demanding higher prices than most buyers are ready to offer.

“The leveraged buyout has been completely locked out of the bidding tent because of what happened to interest rates and debt financing,” Knott told Green Street, four ‘regarding the general market. “The buyers haven’t completely reset their expectations to match where the buyers are, so we’re seeing a lot of ad-questions.”

This conflict over valuations has contributed to banks and other credit companies being more aggressive in making new loans. When homeowners come to refinance, they may need to put down up to 25% of the original purchase price to meet bank lending rates, according to JLL’s Guthrie.

This pressure on rates that measure borrowers’ ability to pay interest is “a force not felt since the days of the financial crisis,” said Will Nicoll, the chief executive. the investment of private equity and other assets in M&G Plc, is supervised. it has about £77 billion in assets.

Adam Tooze, a professor at Columbia University in New York who wrote about the disaster in 2008, saw reasons to worry again. “Real estate is a huge economic variable,” he said. “This is the largest asset class and is directly linked to household budgets, so it has implications for consumption.”

“It’s a huge economic risk,” he said.

–With help from Simon Kennedy, Zoe Schneeweiss, Lisa Abramowicz and Tasos Vossos.

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