From a fraught refinancing process for an office building in the City of London to the strained sale of the Commerzbank Tower in Germany’s financial hub, investors are scrambling to find ways to bridge financing gaps as lending markets seize up from rapidly rising interest rates.
The reality check will start to hit in the coming weeks as lenders across Europe get results of year-end appraisals. Hefty declines in valuations threaten to cause breaches of loan covenants, triggering emergency funding measures from forced sales to pumping in fresh cash.
Loans, bonds, and other debt totaling about €1.9 trillion ($2.1 trillion) — nearly the size of the Italian economy is secured against commercial property or extended to landlords in Europe and the UK.
Europe’s lenders will be prodded by the new regulations to act more aggressively on bad loans. They’re also in better shape than during the last real estate crisis more than a decade ago, so could be less inclined to allow issues to fester. That puts the burden on borrowers.
Banks might then act before prices fall further and risk credit losses, forcing indebted landlords into complex alternatives. The issues get thornier for those facing debt maturities. Lenders are reducing the amount of a property’s value they’re willing to loan out. A lower appraisal could act as a double whammy, increasing the funding gap.
Falling real estate values could trigger a “domino effect,” as demands for more collateral could force distressed selling.
Investors will pour a record amount of money into so-called opportunistic funds which make riskier real estate bets.