Analysis: Property titans seek clues in Cannes for market turnaround

Federated Hermes

13/03/2024 06:00

By Iain Withers
       CANNES, France, March 13 (Reuters) - The global real
estate industry is scrabbling around for reasons to be
optimistic in the grip of its biggest crash in more than a
decade, with developers and investors talking up the prospect of
a recovery - just not quite yet.
    Held this week in Cannes on the French Riviera, the MIPIM
property conference unfolds against a backdrop of falling
commercial real estate (CRE) prices and developers wondering
what to do with offices emptied out by the pandemic.
    As an expected 20,000 investors, developers and agents began
arriving, delegates gathered around miniature models of planned
developments and met clients on company-commandeered yachts.
Many were busy discussing the market fallout, others trying to
strike deals.
    Several of the largest real estate investors - including
U.S. giants LaSalle, Greystar, Hines and Federated Hermes
 FHI.N , France's AEW and Germany's Patrizia  PATGn.DE  - told
Reuters they saw tentative signs of deal activity rebounding.
    But some also struck a note of caution.
    "There's a lot of hot air being pushed through the
Croisette," Philip La Pierre, head of Europe at LaSalle
Investment Management, said at the conference, referring to
Cannes' beachside thoroughfare thronged with estate agents. "So
you've got to navigate that quite carefully."    
    A punishing rise in borrowing costs and empty offices have
combined to sour many property investments, although sectors
such as data centres and logistics have held up much better. 
    European commercial capital values fell 13.9% year-on-year
in the fourth quarter of 2023, the biggest drop since the global
financial crisis in 2009, according to MSCI Real Assets data
shows. 
    LaSalle's La Pierre reckons 30% of European office space is
"probably obsolete."
    Prices in American cities are down sharply too as vacancy
rates in the likes of San Francisco and Los Angeles near 30%.  
    Rather than realise losses, investors are sitting on the
sidelines. 
    Commercial property deal volumes in Europe collapsed by half
in 2023 to 166 billion euros ($181 billion), and it was the
worst year for office sales on record, said MSCI, which has been
collating the data since 2007.
    Despite this, some investors believe a turnaround is near if
central banks begin cutting interest rates, easing companies'
debt burdens.
    "In general, there's a renewed sense of confidence and
enthusiasm for the year ahead," James Seppala, head of real
estate in Europe for the world's largest commercial property
owner, Blackstone  BX.N , said ahead of the event.
    "We have been active over the last few months, and we will
continue to look to be active," he added.
    
          
    UNSELLABLE
    A big test of improving sentiment will be MIPIM itself.
Investors and property agents have been toasting deals at the
annual jamboree since 1990, but there were few to speak of last
year.
    "The worst of the market is now unsellable," said Jose
Pellicer, head of investment strategy at investor M&G Real
Estate.   
    Europe has been less afflicted by visible signs of property
distress than the U.S. and China, but sharp sell-offs have
occurred for exposed lenders in Germany and Sweden. 
    Austrian property tycoon Rene Benko's Signa Group - the
co-owner of New York's Chrysler Building - collapsed in
November, rocking confidence further.
    "There is a big real estate crisis ongoing which is global,"
said Antoine Flamarion, co-founder of investors Tikehau Capital
 TKOO.PA . "It might take some time to play out."
    Major banks have been relatively unscathed so far. Large
European banks have been cutting CRE lending, according to
Morgan Stanley.
    This could put alternative lenders that tend to be more
leveraged such as asset managers and insurers on the hook for
more losses. They already make up around 20-30% of Europe's CRE
loans, according to Bayes Business School.
        
    FURTHER TO FALL?
    Whether the slump in office prices widens out into a broader
crisis will depend partly on whether banks and developers can
avoid crystallizing losses until borrowing costs fall, or demand
returns.
    Some lenders are re-adopting an "extend and pretend" 
approach to bad loans, a popular tactic after the 2007-09
financial crisis to avoid foreclosing on properties.
    "You extend and pretend simply because even if you enforce
you probably couldn't sell the asset in the current market,"
Mathew Crowther, a managing director at investor PGIM Real
Estate, said in the run-up to MIPIM.  
    Property prices could be closer to bottoming out in markets
such as Britain, where prices have corrected faster, but are
seen falling further in the likes of Germany. Rob Wilkinson, CEO
of France-based investor AEW, expects German office prices to
decline 10% more in the first half of this year.
    "Last year was one of the hardest capital-raising years
ever," Selena Ohlsson, director of real estate client solutions
at Federated Hermes, said in Cannes. But she said investor
interest was returning, particularly from the Middle East and
Asia Pacific: "I've got a bit more hope than I did last year."  
    
 ($1 = 0.9150 euro)

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European commercial property sales crashed in 2023    https://reut.rs/3Pg7Mp7
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 (Reporting by Iain Withers in Cannes
Additional reporting by Stefania Spezzati in London
Editing by Tommy Reggiori Wilkes and Matthew Lewis)
 ((Iain.Withers@thomsonreuters.com;))