Global Property Debt In Distress

Almost US$175bil In Global Property Debt In Distress

GLOBAL – Data compiled by Bloomberg showed that the amount of global real estate debt that is already distressed reached nearly US$175 billion, which surpasses the next largest sector by around four-fold, reported the news outlet on Friday morning (20 January, SGT)

As the impact of interest rate hikes and the end of easy liquidity mounts, many property markets across the world have slowed or nearly ground to a halt, with some banks telling borrowers to dispose assets or risk foreclosure even though landlords are requiring more funds.

“What we have in this downturn is a fairly unique set of economic circumstances. Interest rates are tightening instead of softening the blow for real estate and other corporates,” said Jones Lang LaSalle’s (JLL) Senior Managing Director at a loan advisory team, Ian Guthrie.

“You have a pipeline of potentially defaulting loans” where “values are under pressure and cash flows are under pressure.”

In fact, distress levels in European property are at the highest in around ten years partly due to a fall in liquidity, based on a research by law firm Weil, Gotshal & Manges. According to JLL data, approximately 10 percent of corporate loans in Europe are already underperforming and showing higher credit risk.

In the UK, MSCI data revealed that the valuation of commercial property plunged over 20 percent during H2 2022, while Green Street statistics showed that values in the US commercial real estate market fell by 9 percent.

In 2023, “is when problems will start to manifest themselves,” Guthrie reckons.

Inevitably, the drop in transactions and development of commercial properties and residential assets would significantly affect real-world spending. In turn, this would impact jobs and economic growth.

The consequences are already being felt across the world. A subsidiary of Brookfield real estate warned last November that it may face difficulty refinancing loans collateralised by two downtown Los Angeles buildings. The subsidiary also raised the possibility of the properties being foreclosed, which Barclays analysts described as “concerning” for the market.

In Australia, Caydon Property Group said it entered into receivership because of rising interest rates and COVID lockdowns.

In the UK, “we expect to see some casualties” among developers, and there will likely be fire sales, noted Nicole Lux, who studies property credit at Bayes Business School.

In the United States, the signs of a downturn are becoming more evident. Despite a contraction, the valuations of commercial properties are “are still moderately overpriced,” stated Green Street’s Head of US REIT Research Michael Knott.

“Appraisers are behind the curve (and) transaction activity has slowed down considerably,” said Knott, who expects US commercial property values to fall by 5 to 10 percent further in 2023.

In particular, the most vulnerable assets in the commercial real estate sector are older buildings vacated by tenants and projects that have yet to be completed.

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