There’s Something Nasty Brewing in Europe

There’s Something Nasty Brewing in Europe
Theodora Lee Joseph, CFA

11 months ago2 mins

If you look at the world’s major stock markets, 2023 has started off with an absolute spring in its step. But if you look at this corner of Europe’s real estate market, it’s limping pretty noticeably. According to data compiled by Bloomberg, almost $175 billion of commercial real estate credit is “distressed” – meaning that these loans are unlikely to be paid back. That may be a sliver of Europe’s total real estate bond market, but it’s roughly four times more than what’s being seen in other industries. And it’s only likely to get worse, as interest rates continue to rise and real estate valuations fall.

See, when valuations decline, they place more stress on such debt, since real estate loans are usually secured against the value of properties. Falling real estate values can result in forced selling as debtors have to raise capital in order to meet collateral requirements. Take the UK for example: valuations for commercial property fell 13% in 2022, and Goldman Sachs is forecasting that they could fall further, to about 20%. While valuations haven’t declined enough to place the real estate loans held by banks under stress, things could change easily when year-end valuations are conducted at the end of this quarter.

You might not be invested in real estate, let alone own any real estate bonds, but you may still want to keep an eye out on what happens in the market. After all, a blow-up in Europe’s real estate market is likely to have contagion effects on its banking system and the rest of the economy. An estimated $2.1 trillion in debt is currently secured against real estate in Europe and the UK. To put it into context, that’s just a tad lower than the size of Italy’s economy. History suggests that every Fed rate hiking cycle ends with a major financial failure and if that’s the case, you may want to hold on to your defensive assets a little longer.



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