Forced sales ahead for indebted global real estate markets -M&G

Jones Lang LaSalle Incorporated

28/11/2023 06:00

By Sinead Cruise and Carolyn Cohn
       LONDON, Nov 28 (Reuters) - M&G Real Estate  MNG.L 
forecasts it is "a matter of time" before global property
markets face greater volumes of forced selling, with banks
increasingly reluctant to refinance troubled or lower quality
assets at current interest rates.
    Property developers in China, Germany and Sweden have in 
particular suffered as a result of a sharp rise in borrowing
costs in recent years, with some projects financed at
rock-bottom rates now close to, or breaching, key loan terms.
    "We had it really good in the last 25 years but now
financing costs are higher and returns will have to come either
from rental growth, or from adding value to properties," Jose
Pellicer, head of investment strategy at M&G Real Estate said.
    "We are in a new period of real estate investment that will
require a new mindset," he told Reuters before the publication
of the firm's Global Real Estate Outlook on Tuesday.
    Pellicer said a recovery in the Chinese market would likely
take time, although its troubles were cyclical rather than
structural and key growth drivers like urbanisation were intact.
    In Europe, Germany would likely see the largest volume of
forced property sales, Pellicer predicted, with the market
reeling more than others from higher costs of real estate debt
and a sharp repricing of assets.
    Nearly 40% of outstanding British commercial real estate
loans are due to mature in 2024 and 2025, where average real
estate values have fallen by over 20% since mid-2022, the report
said, citing data from Bayes Business School.
    Some borrowers would be unable "to meet interest coverage
ratio covenants for loan renewals" and may have difficulty
finding refinancing options open to them.
    M&G, which manages 31 billion pounds ($39 billion) in
property assets, said this might provide an opportunity for
alternative lenders to step in.
    "Real estate debt is becoming an increasingly attractive
investment proposition," Pellicer said. 

    OFFICE WOES
    The global office market has been rattled by the bankruptcy
of WeWork, darkening the outlook for the largest business hubs,
where rising vacancies are already hitting investors.
    But not all offices are equal, Pellicer said. 
    Low-quality offices are a risky investment globally, as
employees remain slow to abandon home working after the COVID-19
pandemic and buildings face costly upgrades to meet
sustainability targets, the report showed.
    The United States is in a far worse position than Asia or
Europe, with downtown vacancy rates in key cities typically
between 25-30% versus single digits in major European business
hubs, Pellicer said.
    U.S. office-based working is at only 50% of pre-pandemic
levels, the report cited real estate services firm JLL  JLL.N 
as estimating, while numbers in Europe have recovered to 75%.
    M&G said a focus on environmental, social and governance
credentials and central locations was creating a market of
prime, ultra-prime, and secondary space, with non-prime
properties facing "significant leasing risk and weak rental
prospects".
($1 = 0.8025 pounds)  

 (Reporting by Carolyn Cohn and Sinead Cruise; Editing by
Alexander Smith)
 ((carolyn.cohn@thomsonreuters.com; 44 207 513 4391;))