CANNES, France, March 13 (Reuters) – The global real estate industry is scrabbling around for reasons to be optimistic in the grip of its biggest crash in more than a decade, with developers and investors talking up the prospect of a recovery – just not quite yet.
Held this week in Cannes on the French Riviera, the MIPIM property conference unfolds against a backdrop of falling commercial real estate (CRE) prices and developers wondering what to do with offices emptied out by the pandemic.
As an expected 20,000 investors, developers and agents began arriving, delegates gathered around miniature models of planned developments and met clients on company-commandeered yachts. Many were busy discussing the market fallout, others trying to strike deals.
But some also struck a note of caution.
“There’s a lot of hot air being pushed through the Croisette,” Philip La Pierre, head of Europe at LaSalle Investment Management, said at the conference, referring to Cannes’ beachside thoroughfare thronged with estate agents. “So you’ve got to navigate that quite carefully.”
European commercial capital values fell 13.9% year-on-year in the fourth quarter of 2023, the biggest drop since the global financial crisis in 2009, according to MSCI Real Assets data shows.
LaSalle’s La Pierre reckons 30% of European office space is “probably obsolete.”
Rather than realise losses, investors are sitting on the sidelines.
Commercial property deal volumes in Europe collapsed by half in 2023 to 166 billion euros ($181 billion), and it was the worst year for office sales on record, said MSCI, which has been collating the data since 2007.
Despite this, some investors believe a turnaround is near if central banks begin cutting interest rates, easing companies’ debt burdens.
“We have been active over the last few months, and we will continue to look to be active,” he added.
UNSELLABLE
A big test of improving sentiment will be MIPIM itself. Investors and property agents have been toasting deals at the annual jamboree since 1990, but there were few to speak of last year.
“The worst of the market is now unsellable,” said Jose Pellicer, head of investment strategy at investor M&G Real Estate.
Major banks have been relatively unscathed so far. Large European banks have been cutting CRE lending, according to Morgan Stanley.
This could put alternative lenders that tend to be more leveraged such as asset managers and insurers on the hook for more losses. They already make up around 20-30% of Europe’s CRE loans, according to Bayes Business School.
FURTHER TO FALL?
Whether the slump in office prices widens out into a broader crisis will depend partly on whether banks and developers can avoid crystallizing losses until borrowing costs fall, or demand returns.
Some lenders are re-adopting an “extend and pretend” approach to bad loans, a popular tactic after the 2007-09 financial crisis to avoid foreclosing on properties.
“You extend and pretend simply because even if you enforce you probably couldn’t sell the asset in the current market,” Mathew Crowther, a managing director at investor PGIM Real Estate, said in the run-up to MIPIM.
Property prices could be closer to bottoming out in markets such as Britain, where prices have corrected faster, but are seen falling further in the likes of Germany. Rob Wilkinson, CEO of France-based investor AEW, expects German office prices to decline 10% more in the first half of this year.
“Last year was one of the hardest capital-raising years ever,” Selena Ohlsson, director of real estate client solutions at Federated Hermes, said in Cannes. But she said investor interest was returning, particularly from the Middle East and Asia Pacific: “I’ve got a bit more hope than I did last year.”
($1 = 0.9150 euro)
Sign up here.
Reporting by Iain Withers in Cannes
Additional reporting by Stefania Spezzati in London
Editing by Tommy Reggiori Wilkes and Matthew Lewis
Our Standards: The Thomson Reuters Trust Principles.