Experts suggest that the European commercial real estate property market will continue to face headwinds in the coming years, with the potential for significant losses.
The logos of major banks have long adorned the grandest office buildings in Europe, from Canary Wharf in London to La Défense in Paris and Frankfurt’s Bankenviertel.
However, early evidence suggests that these buildings could become liabilities for banks and investors as they are buffeted by rising costs and post-Covid workplace changes.
According to Bayes Business School at City, University of London, offices are the largest component of a commercial property market that lenders and investors have backed with €1.5tn of debt in Europe alone.
About €310bn of new or replacement borrowing is issued to keep the market moving in a typical year.
Since the pandemic began, developers and landlords have had to adjust to life with an increase in hybrid working among their professional services tenants such as banks, law firms, and consultancies, some of whom are reducing their office space.
Property owners are now having to contend with a rapid increase in borrowing costs as central banks ratchet up interest rates to contain a sharp rise in inflation.
Leverage has always been a central feature of commercial real estate, but recent bank failures in the US and the state-brokered rescue of Credit Suisse by its rival UBS have added to fears that credit will become less available and more expensive.
Property prices have already fallen sharply in recent months while older buildings in peripheral locations are becoming much harder to sell.
Analysts at Citi have warned clients that European real estate values had still not fully factored in rising interest rates and could fall by up to 40 per cent by the end of 2024.
The situation is compounded by the fact that the iconic buildings housing major banks in Europe could become increasingly obsolete in a hybrid working world.
This represents a significant challenge for the banks themselves and their investors, who will have to consider how to manage these assets going forward.
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