The prices of commercial real estate in the euro area could continue to fall in the future. This is the conclusion of a report from the European Central Bank. This particularly affects the office market.
The current price slide for commercial real estate in the euro area will continue. The European Central Bank (ECB) announced this at the launch today its half-yearly financial stability report with. These properties are one of the most important areas of vulnerability in the financial system.
“We believe that the price adjustment will continue over time, but not at the same speed that we have seen in the past two years,” said ECB Vice President Luis de Guindos.
Poor prospects for office properties
The involvement of European banks in the commercial real estate sector is quite limited. It is only around five percent of the entire loan portfolio. According to the report, in the fourth quarter of 2023, commercial real estate prices fell by 8.7 percent year-on-year. According to this, only around half as many transactions were completed in the last two quarters of 2023 as in the same period of the previous year in 2022.
In particular, the outlook for the market for office space is bleak. The increasing use of home offices has led to a structural decline in demand. Therefore, significantly less growth in rents is expected than before the corona pandemic.
Office properties of rather low quality are particularly affected by this. The reason for this is, for example, the increased requirements for energy efficiency.
Falling profit margins Real estate company
“Decreasing rental income, increasing investments and higher financing costs pose a triple threat to real estate companies,” the report said. The profit margins of the largest real estate companies in the euro area have fallen sharply since the beginning of 2022, meaning that around half of them are making losses.
However, the conditions in the euro area are still better than in the USA. People there are working from home much more often. In addition, there is an oversupply of office properties.
Stabilization of residential real estate
When it comes to residential real estate, however, the ECB sees some signs of stabilization. Data from euro area countries suggests that the decline in house prices slowed or even stopped in some countries in the second half of last year.
Nevertheless, according to the ECB, the risks remain elevated in some euro area countries. Investments in residential real estate have fallen due to financial conditions. However, the resulting “decline in housing supply and the expectation of rising construction prices” could somewhat mitigate the risk of a significant price drop in the future.
In Germany, the prices for houses and apartments fell more sharply last year than at any time since the turn of the millennium. Residential properties fell on average by 8.4 percent compared to the previous year, according to the Federal Statistical Office. “This was the largest year-on-year decline since the time series began in 2000 and the first decline since 2007.”