Is a commercial real estate crisis unfolding across Europe? (2024)

The past week has witnessed significant downturns in the stock values of several banks worldwide, particularly those with substantial exposure to commercial property loans.

Mirroring unsettling developments in Japan and the United States, Europe is now facing the prospect of an emerging commercial real estate crisis.

The American prelude: A warning sign

The situation took a concerning turn in the United States, where New York Community Bancorp (ticker: NYCB) became a focal point of market anxiety.

With assets surpassing $100 billion (€92 billion), approximately 60% of which are tied to commercial properties in Manhattan, NYCB's unexpected losses in the fourth quarter and disappointing revenue figures led to a dramatic market sell-off, as its shares tumbled more than 50% from their late January levels.

European Banks under the microscope?

Europe's banking sector is now facing similar scrutiny. Deutsche Pfandbriefbank AG (PBB), a Bavarian landesbank with over a century of specialisation in commercial real estate finance, has been particularly affected this week.

The bank announced risk provisions totaling between €210 million and €215 million, attributed to the "persistent weakness of the real estate markets," which the bank described as "the greatest real estate crisis since the financial crisis."

PBB's shares have dropped by 17% over the past four days, with its subordinated bond (ISIN: XS1808862657) falling to below 40 cents on the dollar. This downturn, though severe, has been somewhat mitigated by PBB's relatively modest market capitalisation of €628 million.

Deepening concerns over European commercial real Estate

The European Central Bank (ECB) and the credit rating agency Moody's have both expressed significant concerns over the stability of the commercial real estate sector in Europe.

In its latest Financial Stability Review released in November, the ECB highlighted a persistent decrease in commercial real estate prices, exacerbated by a stagnant market that has severely impacted the price discovery process.

The ECB also detailed a worrying decline in transaction activity within the commercial real estate markets, which experienced a dramatic 47% drop in the first half of 2023 compared to the same period in 2022.

Moreover, the European Central Bank cautioned about the potential for repayment capacity challenges due to the harmful mix of rising financing costs and decreasing rental incomes.

Moody's, in an August 2023 warning, identified several critical factors exacerbating the sector's challenges, many of which echo the issues faced by the US market, such as secular changes in office property demands, driven by the adoption of hybrid work models and tightening environmental regulations.

Eye on Europe's largest office REITs

Amid these developments, market focus may shift to Europe's largest office Real Estate Investment Trusts (REITs):

 Gecina (GFC) boasts Europe's premier office portfolio, with nearly 97% located in the Paris region, valued at €22 billion.

 Inmobiliaria Colonial, SOCIMI, S.A., a Spanish listed REIT, focused on the European Prime office market, with operations in Barcelona, Madrid, and Paris. Its prime office portfolio is valued at over €12 billion.

 Derwent London plc, with 66 buildings in its commercial real estate portfolio primarily in central London, valued at over €6 billion as of June 30, 2023, stands as the largest London-focused office REIT.