Global office and retail property markets are particularly vulnerable to an emergence of forced sales due to an anticipated shortfall in available financing and rising debt costs, according to Oxford Economics.
The consultancy said debt costs continue to soar across advanced economies, threatening to push global real estate markets into distress.
“We believe that the transmission mechanism for forced selling will be refinancing shortfalls, but interest coverage ratios are also looking dangerously low,” it said in a new report.
Last week, Oxford Economics warned that real estate markets, particularly in the US and UK, face a significant price correction next year, due to the rising cost of debt.
Today, the company said: “A financing shortfall looks set to emerge for retail and offices, placing these sectors at greater risk of forced sales.”
Capital values for retail and office assets have declined or been weak over the past five years, the report said, while lending conditions have tightened, meaning a lower loan-to-value is now on offer now relative to five years ago.
Interest coverage ratios also look to be stretched and Oxford Economics warned that private equity direct leverage had been consistently higher than the broader real estate industry since the global financial crisis.
The report said that “little is known about the use of indirect leverage (at company or SPV level) or subscription credit lines (against dry powder) ̶ both of which could add to total debt, increasing the prospect of forced sales”.
Mark Unsworth, associate director of real estate economics at Oxford Economics added: “As debt costs surge, the threat to global real estate markets intensifies. As signs of financial dysfunction grow, policymakers’ desire to continue tightening until excess inflation is fully removed from the economy is starting to clash with the need to maintain financial stability.
“We believe that central banks and governments have the tools to avert the worst outcomes, but continued tightening does raise the risk of an illiquidity event. We believe that the transmission mechanism for forced selling will be refinancing shortfalls, but interest coverage ratios are also looking dangerously low.”
To read the latest edition of the latest IPE Real Assets magazine click here.
