NEW DELHI, Dec 2 (Reuters) – If India needed any more proof that it was in the midst of a huge housing boom, it got in this week’s GDP data, heightening expectations that the industry will continue to power the economy for years to come.
The construction sector grew 13.3% in July-September from a year earlier, up from 7.9% in the previous quarter and its best performance in five quarters, the data released on Thursday showed.
That helped India expand at a forecast-beating 7.6%, making it one of the world’s fastest-growing major economies. In contrast, Western economies have been squeezed by high interest rates and energy prices, while China has been hobbled by a debt crisis in its property sector.
The long-awaited boom – which has created millions of jobs – comes after about six years of debt and pandemic-induced downturn before the construction sector began improving last year and hitting its stride this year. It has been driven by rising incomes for many Indians, a severe housing shortage in big cities and strong population growth.
The world’s most populous nation had an urban housing shortage of around 19 million units last year – and that is expected to double by 2030, according to government estimates.
“The robust growth in construction has significantly contributed to the economic growth – and is likely to play the same role in next couple of quarters,” said Sunil Sinha, an economist at India Ratings and Research, an arm of rating agency Fitch.
Builders are bullish long-term with many saying the boom could last two to three years and some even more optimistic.
“The housing market could continue to perform well for another three to four years,” Sanjeev Jain, managing director at Parsvnath Developers, a leading real estate company, noting that India is in the initial stages of a housing growth cycle.
Home sales in India’s seven largest cities, including Mumbai, New Delhi and Bangalore, rocketed 36% in the July-September quarter from a year earlier to more than 112,000 units, despite an 8%-18% increase in prices, according to real estate consultancy Anarock.
There was also a 24% increase in new residential projects being launched, data from the consultancy showed.
“The home sales are driven by first-time buyers, and nearly 80% of the houses have been bought by end users,” said Prashant Thakur, head of research at Anarock, adding that there was also strong demand from existing home owners to move to more spacious apartments.
In Mumbai, for example, demand has been strong despite an increase in interest rates of about two percentage points, according to Jayesh Rathod, director of Mumbai-based Guardian Real Estate Advisory.
His company has sold over 5,500 flats in Mumbai and on its outskirts in Thane so far this year, a jump of more than 50% compared to the same period a year ago, he said.
Underpinning demand has been salary hikes for workers in big cities. Average hikes for sectors such as e-commerce, healthcare, retail and logistics have remained above 10% for a second straight year, according to EY estimates.
Home prices in India are expected to rise faster than consumer inflation next year, according to a Reuters poll, with property analysts saying growth will be driven by higher earners snapping up newly built luxury residences in cities.
Housing demand has also picked up significantly in smaller cities in the southern states of Tamil Nadu, Karnataka and Prime Minister Narendra Modi’s home state of Gujarat, according to construction companies who say demand has been spurred by increases in incomes and the migration of workers from rural areas.
The government is also trying to boost the availability of affordable housing by providing subsidies, which is encouraging construction in India’s smaller towns and cities.
Shares in property companies have naturally surged.
The Nifty realty index (.NIFTYREAL) is up some 67% for the year to date compared with a 12% gain for the blue-chip Nifty 50 index.
Notable gainers include Prestige Estates Projects (PREG.NS) which has jumped some 120%, DLF (DLF.NS) which has climbed 67% and Godrej Properties (GODR.NS) which is up 52%.
($1 = 83.3143 Indian rupees)
Reporting by Manoj Kumar, Additional reporting by Nigam Prusty; Editing by Ira Dugal and Edwina Gibbs
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The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song/File Photo Acquire Licensing Rights
HONG KONG, Nov 30 (Reuters) – China Evergrande Group (3333.HK), the world’s most indebted property developer, is seeking to avert a potentially imminent liquidation with a last-minute debt restructuring proposal, three people with direct knowledge of the matter said.
The defaulted company has until a Hong Kong court hearing on Monday to present a “concrete” revised debt restructuring proposal for offshore creditors, a judge said last month after its original plan had lapsed.
But the sources, who declined to be named as the talks are private, told Reuters that creditors were unlikely to accept Evergrande’s new proposal given low recovery prospects and growing concerns about the developer’s future.
With more than $300 billion in liabilities, Evergrande exemplifies a crisis in China’s property sector, which makes up one-quarter of the world’s second-biggest economy. The authorities have scrambled to support the sector as the troubles of embattled developers roiled global markets.
Guangzhou-based Evergrande, which defaulted on its offshore debt in late 2021, did not respond to a request for comment.
Ahead of the hearing when the Hong Kong High Court will rule on a liquidation petition, Evergrande this week offered to swap some debt held by offshore creditors into equity in the company and two Hong Kong-listed units, and repay the rest with non-tradeable “certificates” backed by offshore assets, two sources said.
The offshore assets include the developer’s minority stakes in other companies and its receivables, one of the two sources said, and the certificates would be redeemed by Evergrande when it successfully disposes of the assets. The plan is not expected to require regulatory approval, as Chinese regulators have banned the developer from issuing new bonds, he added.
The new proposal also offers creditors a 17.8% stake in Evergrande, in addition to an October offer, previously reported by Reuters, of 30% stakes in each of its two Hong Kong units – Evergrande Property Services Group (6666.HK) and Evergrande New Energy Vehicle Group (0708.HK) – the person said.
Many creditors were dissatisfied with the October terms as they implied a major haircut on investments, sources have said, forcing Evergrande to scramble to sweeten the deal in what could be its final attempt to avoid liquidation.
LIQUIDATION CHALLENGES
The spectre of a messy collapse of Evergrande has been a major concern for global investors as the Chinese economy sputters, with property sales slowing and hundreds of thousands of unfinished homes across the country.
Chinese authorities have announced a string of measures to revive the sector destabilised by the debt woes of giants like Evergrande and Country Garden (2007.HK).
Evergrande’s debt revamp hopes were derailed in late September when the company said billionaire founder Hui Ka Yan was under investigation for unspecified “illegal crimes”.
The developer was banned from issuing dollar bonds, a key part of the restructuring plan, and its flagship mainland unit was put under investigation by regulators.
If the Hong Kong court orders Evergrande’s liquidation, a provisional liquidator and then an official liquidator would be appointed to take control and arrange to sell the company’s assets to repay its debts.
In addition to shares of its two Hong Kong-listed units, this would include selling its onshore assets, which could face significant challenges, restructuring experts say.
A lawyer for an ad hoc group of key offshore bondholders told the Hong Kong court last month that the restructuring plan could have a higher recovery rate for creditors than liquidation, in which they would get back less than 3%.
Still, the group has nominated consultancy Alvarez & Marsal as its preferred liquidator, two other sources said, as creditors anticipate a potential liquidation of Evergrande, whose liabilities and assets are largely in mainland China.
Alvarez & Marsal did not immediately respond to request for comment.
Top Shine, an investor in Evergrande unit Fangchebao, filed the liquidation petition in June 2022 after it said the developer failed to honour an agreement to repurchase shares the investor had bought in the subsidiary.
Reporting by Clare Jim and Xie Yu in Hong Kong, Scott Murdoch in Sydney; Editing by Sumeet Chatterjee and William Mallard
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FILE PHOTO: The logo of SBB is seen at company’s headquarters in Stockholm, Sweden, September 14, 2023. REUTERS/Marie Mannes/File Photo/File Photo Acquire Licensing Rights
COPENHAGEN, Nov 22 (Reuters) – Fitch on Wednesday downgraded Swedish property company SBB’s (SBBb.ST) long-term issuer default rating to CCC+ from B-, and its senior unsecured debt rating to B from B+, driving the group’s bonds deeper into speculative or ‘junk’ territory.
Loss-making SBB is at the centre of a Swedish property crash, having racked up vast debt by buying public real estate, including social housing, government offices, schools and hospitals.
“The downgrades reflect SBB’s third quarter results and its tight liquidity, including insufficient existing liquidity to reduce refinancing risk after the end of the third quarter 2024, and unfavourable real estate and capital market conditions,” Fitch said in a statement.
“SBB continues to undertake asset disposals but execution risk remains high,” the ratings agency added.
SBB did not immediately respond to a request for comment.
Fitch already in May cut the group to below investment grade status for the first time and again downgraded the company in August.
Fitch on Wednesday said SBB was unlikely to have capital market access to refinance its unsecured bonds, adding that without an ability to tap bond markets, the real estate company would have to sell assets to meet debt maturities.
Rival ratings agency S&P on Friday said it had placed SBB on credit watch for a potential downgrade to a selective default over the company’s offer to use proceeds from a property sale to buy back debt for up to $650 million.
If debt is bought at a substantial discount to the original value, this could be considered tantamount to default, S&P said.
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Reporting by Louise Breusch Rasmussen in Copenhagen, Marie Mannes in Stockholm, editing by Anna Ringstrom, Terje Solsvik and Bernadette Baum
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A person waits for a teller at a Signature Bank branch in New York City, U.S., March 13, 2023. REUTERS/David ‘Dee’ Delgado Acquire Licensing Rights
Nov 19 (Reuters) – Blackstone (BX.N) is the lead to win the $17 billion portfolio of commercial-property loans from the U.S. Federal Deposit Insurance Corp’s (FDIC) sale of Signature Bank debt, Bloomberg News reported on Sunday.
In September, the FDIC was seeking buyers for the $33 billion commercial real estate loan portfolio of failed New York lender Signature Bank.
The bidding process has brought in several finance companies such as Starwood Capital Group and Brookfield Asset Management (BAM.TO), according to the Bloomberg report.
The FDIC hired Newmark Group (NMRK.O) in March to sell about $60 billion of Signature Bank’s loans, after state regulators decided to close the failed lender amid turmoil in regional banks earlier this year.
FDIC declined to comment on the report. “We only comment on sales after they close. The entire portfolio sale has yet to close,” it said.
Blackstone, and Newmark Group did not immediately respond to requests for comment.
Reporting by Chandni Shah in Bengaluru; Editing by Lisa Shumaker and Bill Berkrot
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BERLIN, Nov 16 (Reuters) – On Berlin’s broad avenues, posters put up by desperate would-be tenants seeking accommodation have become a common sight. Home viewings draw long lines of hopefuls, despite rent rises that have far outstripped salaries in recent years.
The German capital, where cheap and abundant apartments were a magnet for artists and young professionals as recently as a decade ago, now has a vacancy rate of less than 1%. The cost and difficulty of renting is making it hard to attract talent and forcing some residents to leave, even though businesses are desperate for skilled labour.
And while the local government says Berlin has sufficient space to build over 100,000 apartments, there is no sign the housing crisis gripping the city will ease.
Rolf Buch, chief executive of Vonovia (VNAn.DE), Europe’s largest landlord, cited factors including record-high interest rates and rent controls to explain the chronic mismatch between housing supply and demand.
“New construction hardly makes sense for many projects these days, because with 5,000 euros per square metre and 4% interest, someone has to finance it,” he told Reuters.
“When I go to the bank, they tell me, Mr. Buch, come back when you’ve done the calculations again, because you can’t even earn interest on the rent.”
The surge in borrowing costs has already tipped some German property developers into insolvency. It is also keeping potential home buyers in the rental market, despite a recent easing in house prices after years of rapid growth.
With construction projects on hold, the government has announced a 45 billion euro ($47 billion) support package for the sector and measures to encourage house building including tax incentives.
But as Europe’s largest economy teeters near recession, economists warn that high rents will feed inflation and reduce household consumption.
“Rent increases lead to redistribution of incomes, as the poor pay more and the rich earn more,” said Konstantin Kholodilin of the DIW economic institute.
In Berlin, local opposition has frustrated plans to build, while regulation creates a two-tier rental market that is cheap for some long-term tenants and expensive for new renters.
Marwa was excited to move from San Francisco to Berlin with her husband and daughter after being offered a job in July as a corporate strategist at a tech company.
She backed out after finding that renting a two-bedroom apartment would swallow up more than half her six-figure salary – high in Berlin but less than she was earning in California.
“Ninety percent of the reason for not taking the job was how hard it is to find an apartment and the high cost of rentals,” Marwa told Reuters.
DIVISION
About 85% of Berliners rent their homes, according to the International Union of Tenants – far more than Eurostat’s figures of 53% for Germany as a whole and a European Union average of 30%.
In the last seven years, Berlin rents have jumped 44% while the average wage in the city has increased only 30%, federal and local data shows.
It hasn’t always been like this.
After the 1989 fall of the Berlin Wall the city had a housing glut that lasted decades, the legacy of its division following World War Two. Both West and East German governments poured money into building accommodation, reflecting the city’s place at the centre of competing Cold War systems.
“It was a divided city and the whole of Berlin was subsidised,” Buch said.
Expectations that a unified Germany’s new capital would grow rapidly saw more building in the 1990s, “but not as many people came as we thought”, said Monika Neugebauer of residential cooperatives association Berlin Wohngenossenschafts.
In 2004, the City of Berlin sold its indebted GSW social housing unit and more than 65,000 apartments, many vacant or needing renovation, to Goldman Sachs (GS.N) and private equity firm Cerberus (CBS.UL).
The city’s population started growing again in 2005, as birth rates and life expectancy rose and migration increased. Foreigners now make up 24% of residents, their numbers having almost doubled between 2011 and 2023, Berlin statistics office data shows.
Rising property demand saw private companies develop luxury apartments that offered a higher yield – in part, Buch said, because government permissioning for more affordable housing projects was so slow.
Sales of land to the highest bidder further narrowed the scope to build social housing, Neugebauer said.
OPPOSITION
Some building projects have since faced local opposition while a recent attempt to curb rent increases backfired.
In 2014, plans to build 4,700 flats and commercial buildings at the former Tempelhof airport, which closed in 2008 and is now mainly a public park, were rejected in a local referendum.
Housing cooperatives, which offer some of Berlin’s most affordable apartments, scrapped two-thirds of their new building projects after the city’s government announced a rent cap, saying it made them unviable.
Introduced in February 2020, the cap was declared unconstitutional and scrapped 14 months later. In that time, it lowered rents by 7.8%, data from real estate portal ImmoScout24 shows – but the number of available apartments fell by 30%.
“Competition for the flats on offer thus intensified significantly,” ImmoScout24 managing director Gesa Crockford said.
A German law that limits how often a landlord can increase prices keeps rents low for long-term tenants compared with new arrivals and gives them little incentive to move.
“The asking rents in Berlin are sometimes twice as high, and in some cases three times as high as the existing rents, due to the very limited supply,” said Martin Pallgen, a housing spokesperson for the Berlin government.
That in turn means the housing stock is used inefficiently, with growing families squeezed into small apartments and less downsizing by people whose children have left home.
Anna Hohnrath, a 27-year-old account manager from Valencia, Spain, moved into her boyfriend’s 36 square metre flat in April as a stop-gap until they could find a bigger space.
Their search took eight months, after applying to view more than 100 apartments and having offers rejected on eight.
“You start wondering if you are doing anything wrong,” Hohnrath said.
Additional reporting by Matthias Inverardi; Editing by Matthias Williams and Catherine Evans
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The logo of property developer Shimao Group is seen on the facade of Shimao Tower in Shanghai, China January 13, 2022. REUTERS/Aly Song/File Photo Acquire Licensing Rights
HONG KONG, Nov 16 (Reuters) – A court auction to sell vast commercial land plots owned by defaulted Shimao Group (0813.HK) in Shenzhen failed for a second time on Thursday as there were no bidders, highlighting weak demand in China’s property market.
Twelve land plots totalling 243,602 square metres, together with some uncompleted buildings on them, have asked for 10.4 billion yuan ($1.4 billion), 20% lower than the 13 billion yuan starting price in the first auction in July, according to e-commerce company JD.com’s (9618.HK) online auction platform.
China’s property sector, which has seen many company defaults since it slipped into a debt crisis in mid-2021, is struggling to stabilise due to a bleak economic outlook.
The Shenzhen plots were part of the land parcel bought by Shanghai-based Shimao in 2017, which planned to build a new landmark complex in China’s tech hub with the city’s tallest skyscraper.
Many of the assets of Shimao, which defaulted its $11.8 billion of offshore debt last July, were being sold to raise funds or were seized by creditors.
Media reports said the land plots, valued at 16.3 billion yuan, were the most valuable assets being auctioned by Chinese courts in seven years.
China’s government land sales revenue and property sales both fell at a faster pace in October, down 25.4% and 20.33% respectively from a year earlier, official data showed this week, suggesting the crisis-hit sector is yet to emerge from its decline despite Beijing’s support efforts.
Authorities have been ramping up measures to support real estate, including relaxing home purchase restrictions and lowering borrowing costs.
($1 = 7.2594 Chinese yuan renminbi)
Reporting by Clare Jim; Editing by Stephen Coates
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A worker walks past a construction site near residential buildings in Beijing, China April 14, 2022. Picture taken April 14, 2022. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
BEIJING, Nov 16 (Reuters) – China’s new home prices fell for the fourth straight month with dozens of cities hit by declines, the most since the peak of the COVID-19 pandemic last year, suggesting a broader weakening in the sector that could drag on the country’s overall recovery.
New home prices in October dropped 0.3% month-on-month after a 0.2% dip in September, according to Reuters calculations based on National Bureau of Statistics (NBS) data.
Once a key engine of economic growth accounting for around a quarter of China’s economic activity, a regulatory crackdown since 2020 to curb debt has tightened liquidity and raised default risks for developers, delaying many projects.
Authorities have rolled out a flurry of measures to prop up the pivotal sector, including relaxing curbs on home purchases and cutting borrowing costs but homebuyers remain cautious.
“The most important reason for the bearish home prices is that demand is weak, buyers don’t know if pre-sold homes they buy will be delivered on the dates promised by the developers,” said Ma Hong, senior analyst at Zhixin Investment Research Institute.
Nomura estimated there are around 20 million pre-sold units that are either not yet constructed or delayed. That is equivalent to 20 times the number of unfinished projects by indebted developer Country Garden (2007.HK) as of end-2022.
Bearish home prices follow data on Wednesday showing some improvement in industrial output and retail sales, which both beat expectations in October, but overall investment growth was tepid and property sales and investment slumped sharply.
“Residents remain uncertain about income growth, and there are poor returns on financial investments in the country. They are hesitant to buy a big-ticket item like a house,” Ma added.
Out of 70 cities, 56 reported declines in monthly prices last month, marking the most cities number since October 2020, up from 54 in September.
TWIST AND TURNS
House prices in three major cities Beijing, Shenzhen and Guangzhou all fell month-on-month in October.
Compared with a year earlier, nationwide prices were down 0.1%, matching a decline in September, August and July.
For existing home, NBS data showed 67 cities posted month-on-month price declines in October, up from 65 in September.
The property market is still in adjustment and transformation, and there will be “twists and turns” in the economic recovery, Liu Aihua, spokesperson for the National Bureau of Statistics, said on Wednesday.
Despite the lifting of strict COVID measures late last year and a slew of support measures, the world’s second-biggest economy has struggled to get back on solid footing, largely due to weak consumer confidence and the deepening property crisis.
“House prices are expected to continue to fall in the traditionally low season of November and December,” said Zhang Dawei, analyst at property agency Centaline.
Zhang said property policies, especially in the first-tier cities, need to be stepped up.
China’s central bank plans to provide at least $137 billion of low cost financing to the country’s urban village renovation and affordable housing programmes.
Reporting by Liangping Gao, Ella Cao and Ryan Woo; Editing by Jacqueline Wong
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An old house is seen in front of new apartment buildings in Guangfuli neighbourhood, in Shanghai, China, April 18, 2016. REUTERS/Aly Song/File Photo Acquire Licensing Rights
HONG KONG, Nov 15 (Reuters Breakingviews) – Xi Jinping is stuck between debt-ridden developers and risk-shy bankers. The Chinese president’s latest attempt to boost housing through cheap loans is an enlarged version of a 2022 scheme. That didn’t work because lenders balked at increasing their exposure to over-leveraged real estate groups. Xi needs to articulate a broader plan to restore banks’ confidence in the troubled property sector.
The People’s Bank of China plans to provide at least 1 trillion yuan ($137 billion) of low-cost financing to shore up an ailing property market that at its peak accounted for more than 20% of the Chinese economy. Authorities will inject the fund in phases into urban renewal projects and public housing programs through state-directed policy banks, Bloomberg reported on Tuesday. They hope that, eventually, the money will trickle down to homebuyers.
Beijing’s problem is that the cash it doles out may not reach the intended targets because banks are reluctant to pass it on to property developers. The PBOC began providing interest-free loans to state banks in November last year after homebuyers staged nationwide protests and refused to make mortgage payments on unfinished homes. But banks have so far taken up less than 1% of the 200 billion yuan offered by the central bank, according to the Financial Times, due to high risks associated with distressed projects.
Authorities have stepped up efforts to put a floor under a market downturn in which nearly all major private-sector property firms have defaulted. The sour mood stemming from falling house prices is also weighing on consumer confidence and the broader economy.
Xi was grappling with a similar vicious cycle in 2013 when he first came into office. Things only started to change two years later when his administration intensely pushed a policy directive aimed at “destocking” the property sector, or helping developers reduce their inventory of unsold homes. Chinese banks heeded the strong signal coming from Beijing. They started to finance local governments to pay off displaced residents of shantytown redevelopments, who used the money to buy new homes.
That helped to shore up property prices and avert a crash. Paradoxically, that “destocking” led to a quick “restocking” as major developers quickly took on more debt, causing the real estate bubble that Beijing is fighting right now.
Still, simply throwing money at reluctant banks won’t help heal the current real estate wounds. Xi may need to take a page out of his own playbook and come up with an all-encompassing policy to deal with the problem once and for all.
CONTEXT NEWS
The People’s Bank of China plans to inject at least 1 trillion yuan ($137 billion) of low-cost financing into the real estate sector, as authorities step up efforts to shore up the struggling property market, Bloomberg reported on Nov. 15.
In November 2022, Beijing set up a similar scheme to provide 200 billion yuan in interest-free loans through state banks to finance stalled housing projects across the country. Less than 1% of the funds have been tapped, the Financial Times reported on Sept. 14, as Chinese banks are reluctant to bear the risks of lending to distressed projects.
Editing by Francesco Guerrera and Thomas Shum
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
[1/4]View of the construction site of the Elbtower building, owned by Rene Benko’s Signa and a Commerzbank subsidiary, in Hamburg Germany, November 2, 2023. REUTERS/Fabian Bimmer Acquire Licensing Rights
FRANKFURT, Nov 3 (Reuters) – Construction of one of Germany’s tallest buildings has suddenly halted midway after the developer stopped paying its builder, yet another ominous sign for the nation’s troubled property sector.
Signa, the Austrian property giant and an owner of New York’s Chrysler Building, had been making steady progress this year on the planned 64-story Elbtower skyscraper in Hamburg.
But Signa, founded by René Benko, has fallen behind on its payments to its builder, Lupp, an executive of the construction firm said.
“Our construction activities at Elbtower have been temporarily suspended due to outstanding payments from the developer,” Matthias Kaufmann, who oversees Lupp’s finances, said in an email to Reuters.
Signa didn’t respond to requests for comment. The city of Hamburg and a minority investor, the real-estate subsidiary of Germany’s Commerzbank (CBKG.DE), confirmed the stoppage.
The interruption raises questions about the future of the tower, with an estimated value of 1.3 billion euros ($1.38 billion) upon completion. It has also prompted warnings from city officials, and is another indicator of troubles hitting the property sector in Europe’s largest economy.
The real-estate sector was a bedrock of Germany’s livelihood for years, accounting for roughly a fifth of output and one in 10 jobs. Fuelled by low interest rates, billions were funnelled into property, which was viewed as stable and safe.
Now a sharp rise in rates and building costs has put an end to the run, tipping developers into insolvency as bank financing dries up, deals freeze and prices fall.
Commerz Real, the Commerzbank subsidiary, said talks were ongoing with Signa and Lupp to “find a common solution” and it expected building to resume.
Elbtower is in the HafenCity district that is also home to a new concert hall, the Elbphilharmonie. Tenants are to include a Nobu hotel and restaurant, the risk advisor Aon (AON.N), and a local bank.
Timo Herzberg, CEO of Signa Real Estate, hosted viewers just weeks ago to the site as the shell of the building neared 100 metres (330 feet) high.
“The distinctive concrete pillars now give an increasingly clear idea of the shape that Hamburg’s future landmark will have once it is completed,” he posted on LinkedIn.
Karen Pein, Hamburg’s senator for city development and housing, warned that Signa needed to stick to agreed milestones or face consequences.
A contract “allows the City of Hamburg to dismantle the construction work performed to date, sell it to a third party for completion, or complete the construction itself,” she said in a statement.
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LONDON, Nov 3 (Reuters) – The troubles faced by co-working titan WeWork (WE.N) are darkening the outlook for the world’s largest business hubs, where rising office vacancies are already heaping pressure on investors set to refinance big-ticket mortgages next year.
Media reports on Wednesday suggested the New-York listed flexible workspace provider – once privately valued at $47 billion – was weighing a petition for bankruptcy next week.
Backed by Japan’s SoftBank, WeWork aimed to revolutionise the office market by taking long leases on large properties and renting the space to multiple smaller businesses on more flexible, shorter arrangements.
But like other landlords, it has struggled to persuade some customers since the pandemic to swap working from home for the office at its 650-plus locations worldwide – a trend that has shaken confidence in the sector.
Global office vacancies are expected to climb, hurting rental prospects in cities like New York and London, eight industry executives, investors, lenders and analysts said.
Some leveraged property investors could struggle to earn enough rental income to service rising debt costs, they said.
“The loss of any tenant, especially during a time of relatively slow office leasing, will have a negative impact on office building cashflows and values,” said Moody’s Analytics’ Commercial Real Estate Industry Practice Lead, Jeffrey Havsy.
“This will add to the negative sentiment in the marketplace and make financing harder, especially those buildings that need to refinance in the next 12-18 months,” he said.
A WeWork spokesperson told Reuters the firm was in talks with landlords to address “high-cost and inflexible lease terms” and was striving to remain in the majority of its locations and markets.
The number and volume of real estate loans due for refinancing in 2024 is unclear because many deals are struck privately between borrower and lender, Ed Daubeney, co-head, debt and structured finance, EMEA, at real estate services firm Jones Lang LaSalle, told Reuters.
Analysts estimate the global commercial property lending market is around $2 trillion in size, roughly split 50:50 between banks and alternative lenders in the United States and 85:15 in Europe.
Several experts contacted by Reuters predicted a year of reckoning for property investors and lenders in 2024, with time running out for those turning a blind eye to assets that would be in breach of key lending terms if revalued today.
The value of all global real estate – residential, commercial, and agricultural land – was $379.7 trillion in 2022, Savills said in a report in September, down 2.8% on 2021.
TRANSACTION SLUMP
Real-estate loan refinancings have already been complicated by a plunge in transactions, which are crucial in tracking changes in asset values.
MSCI’s Capital Trends report for Europe showed third quarter volumes down 57% on 2022 levels – the lowest since 2010.
What’s more, the gap between what investors believe assets are worth and what prospective buyers are willing to pay is between 20% and 35% in core office markets – “far worse than the height of the global financial crisis”, MSCI said.
MSCI said prices in Europe’s two largest office markets, Britain and Germany, would have to fall another 13%-15% to bring market liquidity back to its long-run average.
Global lenders to UK real estate holding and development companies, which supplied credit risk assessments to data provider Credit Benchmark in October, said those firms were now 9% more likely to default than they estimated 12 months ago.
U.S. industrial and office real estate investment trusts (REITs) were seen 35.8% more likely to default, versus expectations a year ago.
RE-LETTING
WeWork has 3.25 million square feet of space in central London, with a total annual rent roll of 192 million pounds ($234 million), Jefferies said in a September note. Its biggest U.S. markets are New York and California, where it operates 49 and 42 sites respectively, according to WeWork’s website.
Industry sources said some of its most popular locations could be taken over by rivals at similar rental rates, minimising cashflow issues for landlords.
But flexible workspace demand in Britain is still 11% below pre-pandemic levels, the Instant Group’s 2023 State of the UK Flex Market report in September showed.
Lenders might view the WeWork debacle as a cautionary tale, sources said, potentially requiring borrowers to inject more equity into their properties to reduce the loan-to-value ratio.
But such a request could be problematic if the quantum and duration of rental income remain uncertain.
London office vacancies have surged to a 30-year high, Jefferies also said in September, with average lease lengths on central London offices sliding to six years from 11.6 years a decade ago, according to BNP Paribas Real Estate.
UK property company Helical said it was working on “next steps” for the space at one London property let to WeWork, after recouping rent it had failed to pay via a short-term licence arrangement.
Under-occupied urban offices are not only generating lower than expected rental income for owners but some are also ageing rapidly in a world increasingly sensitive to carbon consumption.
“We’re at a massive turning point in the real estate investment market globally,” Jose Pellicer, head of real estate strategy at M&G Real Estate, said.
“For the last 20 years, property yields have been higher than financing costs. But a far bigger percentage of a property return is going to have to come from growth in the 2020s.”
($1 = 0.9407 euros)
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Reporting by Sinead Cruise
Editing by Elisa Martinuzzi and Mark Potter
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