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Property Faces a Slow Reckoning as Interest Rates Rise

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For property owners, rising interest rates It brings back unpleasant memories of the years leading up to the 2008 financial crisis. Since then, commercial landlords who have learned useful lessons about debt face a slow reckoning, except that their burden of debt has decreased.

While interest rates are rising rapidly in the US, European property owners appear more vulnerable to higher-priced debt. Eurozone listed real estate stocks have an average net debt of 14 times their expected earnings before interest, taxes, depreciation and amortization, according to data.

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compared to six times that of the United States

For the first time since 2009, the cost of borrowing in the Eurozone real estate industry has exceeded the returns available to many investment grade properties. The average cost of debt is 4.4%, while well-located or “prime” office buildings in cities such as Paris and Madrid yield around 3%. Some high-profile property types, such as e-commerce warehouses, also have higher financing costs than revenues, despite rapidly rising rents.This historic change was last week’s 0.75 points interest rate increase According to the European Central Bank.

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Today’s high debt levels may not be as dangerous as they were during the financial crisis. Property owners have reduced their reliance on bank loans, which tend to have relatively short maturities, and have issued long-term corporate bonds instead. Between 2001 and 2009, European real estate companies issued an average of €3.8 billion in bonds per year.

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indicate. Since then, annual issuance has more than tripled, and the average maturity of real estate debt is about 6.5 years.

However, businesses still need to refinance up to 15% of their borrowings each year. According to Bank of America, as more debt matures, earnings erode from higher interest rates by 3% to 7% each year, depending on the type of property. can be offset, but office and shopping mall owners probably won’t because of weak demand from tenants.

Falling valuations are also a risk. As financing costs rise, buyers can only get acceptable returns from real estate if they pay less. They are becoming reluctant to sign deals at today’s high prices Purchases of commercial property in Europe fell by 9% in Q2 2022 compared to the same period last year.

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the data shows.

If valuations fall, real estate companies’ loan-to-value ratios will rise. Some landlords are required to unload their property to avoid breach of contract.Two of Europe’s most indebted real estate companies, German landlords

Vonovia

and shopping mall operators

Univers – Rodamco – Westfield,

There are already plans to sell billions of euros worth of buildings to fix the balance sheet.

One of the risks for investors in real estate stocks is that lower income leads to lower dividends, as a sale would mean losing the cash these assets generate. Some European office real estate investment trusts are already paying out more dividends than their capex-adjusted working capital.

If the last period of rising interest rates shook the foundations of the real estate market, the current period of rising interest rates may be chipping away at it.

write destination carol ryan [email protected]

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