KBRA Releases Research – European Commercial Real Estate: Time for a Turnaround?

LONDON--(BUSINESS WIRE)--KBRA releases a report on European commercial real estate (CRE) and its potential direction. CRE has faced significant challenges, with certain regions and market property sectors experiencing more difficulties than others. Office and retail properties continue to struggle due to the aftereffects of the pandemic and higher interest rates. In contrast, other sectors such as logistics and data centres display resilience, as increasing demand has helped mitigate the pressure from higher interest rates. It has been a difficult period for some CMBS transactions, given the challenges faced when refinancing in the current high rate environment. Valuations have declined and elevated interest rates have increased debt service payment obligations. However, rates appear to have peaked and policy rates have been lowered for both the European Central Bank (ECB) and the Bank of England (BoE). Does this signal a turn in the CRE market?

Key Takeaways

• CRE capital valuations appear to have reached a bottom, remaining largely unchanged for the past nine months after declines of 18% for logistics to 42% for retail from their peak levels, according to CBRE indices.
• Forward-looking equity real estate investment trust (REIT) markets indicate an improvement from the worst. REIT prices are up 22% from their lows in the eurozone, and 26% in the UK, but prices remain constrained relative to historical levels.
• Interest rate reductions have been slower than originally expected but have started to fall. 10-year swap rates are at 2.5% in Europe and 3.7% in the UK.
• Commercial real estate yields remain elevated, with some markets and regions returning to 2014 levels. Prime city office yields in the UK are at 4.0%, while Irish and UK shopping centre yields reach 8.25%.
• A slow commercial construction sector should help to support valuation improvement with little new supply reaching the market in the near term.

Click here to view the report.

Related Publications

• Commercial Real Estate in European Covered Bonds
• European CMBS: Refinance Risk
• European Securitisation: Setting Records
• Four European CMBS Loan KPOs Revised to Underperform
• Rising Interest Rates to Increase Hedging Extension Costs and Refinance Risk
• UK Light Industrial and Urban Logistics Sectors: Storm Clouds Ahead for Rental Growth
• ESG: European Energy-Efficiency Initiatives for Commercial Real Estate: An Introduction

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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