$175B in Global Real Estate Loans is under stress
The global real estate price crash has spread from the housing market to commercial real estate which increases debt stress in the industry. This has the potential to spread to other sectors of the economy such as building materials, household appliances and furniture.
The global real estate price crash has spread from the housing market to commercial real estate which increases debt stress in the industry. This has the potential to spread to other sectors of the economy such as building materials, household appliances and furniture.
Debt stress in European real estate sector is at its highest level in a decade partly due to reduced liquidity, according to a study by law firm Weil, Gotshal & Manges. MSCI data shows that the value of UK commercial property fell by more than 20% in the second half of 2022. In the US, the decline was 9%, according to Green Street.
The decline in transactions and developments in commercial and residential real estate will inevitably impact spending in the real economy, possibly posing risks to jobs and growth.
The sudden end of "cheap money" era that lasted for more than a year has made a worse impact on real estate companies as the Covid-19 pandemic has changed the way people work which caused many commercial real estate owners lose rental revenue.
In November last year, a real estate investment fund of Brookfield Asset Management (Canada), warned that the fund could have difficulty in refinancing two office towers in downtown Los Angeles (US). This increases the risk of the two towers being foreclosed on - what Barclays Bank analysts consider "worrying" for the market.
In South Korea, the late repayment of debts by Gangwon Jungdo Development, the owner of Legoland Korea, a theme park, caused a credit crisis in the country last year, prompting the Bank of Korea to BoK) must intervene to stabilize the market.
In Australia, real estate company Caydon Property Group was also forced to liquidate assets due to the impact of blockades during the Covid-19 pandemic and rising interest rates.
The problems of the real estate sector are spreading to the broader economy. Builders FirstSource, a US-based construction materials manufacturing and trading company, has cut 2,600 jobs. Meanwhile, Made.com, the UK furniture retailer, is falling into insolvency. In October, Electrolux AB, a Swedish home appliance maker, also announced plans to lay off 4,000 employees.
Some US banks predict loan losses will increase this year. In its earnings report for the fourth quarter of 2022, Bank of America warned that it has an additional $1 billion in office real estate loans that are facing the risk of default or late payment. Meanwhile, Wells Fargo Bank predicts more stress on the office real estate market due to weak demand.
In Europe, regulators have warned lower office demand since the Covid-19 pandemic, higher raw material costs and rising borrowing costs will make some projects unviable. And with fewer buyers on the market, many European commercial real estate owners will have to lower the selling prices of their projects.
In Sweden, where home prices are in freefall, Samhällsbyggnadsbolaget i Norden AB has agreed to sell properties worth nearly $1 billion to pay off debt, a sign that real estate developers in the country are working to reduce financial leverage in times of high interest rates.
$175B in Global Real Estate Loans is under stress
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