Oxford Economics has downgraded its real estate value forecasts for Europe due to turmoil in the banking markets, which it says will lead to additional tightening in credit conditions “at a time when the asset class is already reeling from higher debt costs, an inadequate risk premium and emerging refinancing distress”.

The economic consultancy now expects capital values across commercial real estate sectors in Europe to fall by 10% in 2023 – after an 11% correction in the UK and 3% correction in continental Europe last year.

Oxford Economics said the forecast would represent a sharper decline for continental Europe than the region experienced during the global financial crisis.

It also emphasised that “any further intensification of stress in the wider financial sector” would have “severe implications” for the forecast and the situation was “fast moving and fluid”.

In a report released this week, the company said: “After a decade of easy money, it now looks exposed, particularly the parts of the market that have used excessive leverage to boost returns, such as private equity.”

Oxford Economics is also forecasting slower growth in 2024 for the UK commercial property market than previously reported.

“This is a shallower decline than we saw during the global financial crisis, but a meaningful revision to our forecast,” it said.

“In a risk-off environment, the cost of liquidity increases and the definition of a prime asset tightens as lenders and investors shy away from unquantifiable unknowns. This is bad news for the office sector, where there are structural rather than just cyclical concerns, reflected by rising vacancy rates.

“Retail has experienced significant re-pricing in many markets over recent years, but distressed sales will increase as debt matures, further reducing values.

“Although industrial values have been one of the hardest hit to date, we believe there is more upside in a recovery as the energy transition and near-shoring/friend-shoring supplement e-commerce demand. We therefore still expect healthy medium-term performance.”

New Bayes report shows rising cost of debt

A new study by Bayes Business School shows that the cost of debt for European commercial real estate has climbed significantly. The report shows that all-in interest for loans on prime stable assets across European cities now ranges between 4% and 6%, up from between 2% and 3% a year ago.

The pilot study by Bayes (formerly Cass), which builds on its long-standing bi-annual UK commercial real estate lending report, found that debt for asset repositioning and improvement strategies was costly, with all-in interest ranging from 5.5% to 7.5%.

Nicole Lux, senior research fellow at Bayes and author of the report, said there was a consensus that stable assets could attract a slightly higher loan-to-value ratios and lower lending margins than assets involving opportunistic or repositioning investments.

“We are pleased to have received many valuable data submissions for this first European pilot survey,” she said.

“This report shows the speed at which interest rates for real estate loans have been increasing, affecting also lending costs on prime stable assets in Europe’s biggest and most influential cities. Therefore, the pressure of declining property values is decreasing.

“We hope to build on this on a regular basis to bring further transparency into the European private debt market.”

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