Eurozone commercial property companies grapple increased borrowing costs: Konrad Pietka

The average debt of large to medium-sized commercial property companies now exceeds ten times earnings, a figure on par with pre-financial crisis levels.

With the market expecting the ECB to only start bringing rates down in late 2024, if current trends continue, many highly leveraged firms will have to refinance existing fixed rate loans at much less favourable rates, further exacerbating the debt servicing issue.

Rising debt obligation costs are only one part of the problem, as the surge in energy prices and the shift to hybrid working has generated new headwinds for the sector.

Rental income has suffered as tenants demand less office space, proving especially problematic for suppliers of sub-prime, less energy efficient properties.

Additionally, the negative sentiment besieging the sector has noticeably damaged commercial property valuations, with the market value of publicly listed eurozone landlords collapsing to 70 per cent of book value, compared to 110 per cent four years prior.

The ECB will be hoping that the sector can weather the storm, as commercial property makes up 10 per cent of all eurozone bank loans; therefore, any significant defaults could have a sizeable fallout.

In contrast, the residential property sector appears to be faring better supported by more resilient demand and a housing shortage.

The GfK consumer confidence index, an indicator of how individuals perceive their financial and economic prospects, increased from -30 to -24 in November, compared to the previous month.

Consequently, interest rates are now expected to remain ‘higher for longer’ as higher consumer confidence would typically translate into greater consumer spending, and thus generate inflationary pressure.

Rate cut predictions have now shifted, with the first Bank of England interest rate reduction anticipated to be in September next year, rather than June.

As a result, Pound Sterling has rallied to its highest level against the US Dollar since September 4, with strong consumption and an improvement in the Purchasing Managers’ Index (PMI) – a measure of private sector vitality - instilling greater investor confidence in the UK economy.

The figures provide hope that consumer spending would rise adequately in the most active season of the year, with GfK’s Client Strategy Director, Joe Staton, highlighting that the improvement in consumer confidence “will be good news” for retailers looking for a boost from Black Friday and Christmas sales.

However, this outlook should be viewed with some caution as factors such as inflation, borrowing costs and wage growth all have the potential to impact consumer spending. Therefore, sentiment is susceptible to change.

Konrad Pietka is a member of Redmayne Bentley’s investment research team