Foreclosures await the world’s indebted property markets

M&G Real Estate predicts it is “just a matter of time” before global property markets face higher volumes of foreclosures as banks become less willing to refinance distressed or lower-quality assets at current interest rates , writes Reuters.

Construction companies in China, Germany and Sweden have suffered particularly because of the sharp rise in interest rates on loans in recent years. Some projects financed at record low interest rates are now close to or in breach of key loan covenants.

“We’ve had it really well for the last 25 years, but now the cost of financing is higher and returns will have to come from either rental growth or property value additions,” commented Jose Pellicer, head of investment strategy at M&G Real Estate.

“We are in a new period of real estate investment that will require new thinking,” he added ahead of the release of the company’s Global Real Estate Outlook report.

Pelliker notes that the recovery of the Chinese market is likely to take time, although the problems are cyclical, not structural, and key drivers of growth, such as urbanization, are intact.

In Europe, Germany is likely to see the largest volume of property foreclosures, he predicted, as the market is hit harder than others by higher housing debt servicing costs and sharp asset revaluations.

Nearly 40% of outstanding business property loans in the UK are due in 2024 and 2025. Average property prices in the country have fallen by more than 20% since mid-2022, the report said, citing data from Bayes Business School.

Some borrowers will not be able to meet the interest coverage ratio for loan renewal’ and may have difficulty finding refinancing options. M&G, which manages 31 billion pounds ($39 billion) in property assets, said this could provide opportunities for alternative lenders to step in.

“Real estate debt is becoming an increasingly attractive investment opportunity,” notes Pelliker.

Problems in front of the offices

The global office market was shaken by the bankruptcy of WeWork, which darkened the outlook for the largest business centers. The increase in vacancies is already hitting investors.

But not all offices are the same, Pelliker notes. Low-quality offices are a risky investment globally as employees are in no rush to ditch working from home in the wake of the Covid pandemic and buildings face expensive upgrades to meet sustainability goals, the report found.

The U.S. is in a far worse position than Asia or Europe, with downtown vacancies in key cities typically between 25% and 30% versus single digits in major European business centers, Pelliker says.

Office work in the US is at just 50% of pre-pandemic levels, the report said, citing data from consultancy JLL. At the same time, in Europe it has recovered to 75%.

The M&G wrote that the focus on environmental, social and governance merits and central locations created a market for prime, ultra-prime and second-rate space, with non-prime properties facing “significant rental risk and poor rental prospects”.