Analysis-Falling rates offer little shelter from housing storm By Reuters

By Tom Sims, Matt Tracy, John O’Donnell and Iain Withers

NEW YORK/LONDON (Reuters) – Global housing markets, rocked by the steepest rise in interest rates in a generation, will get little relief from the gradual reduction in borrowing costs, with little hope of a return to the free money that fueled a boom .

The multi-trillion dollar industry, which thrived in the decade after the global financial crisis when the cost of money was reduced to zero, was one of the biggest casualties as central banks raised borrowing costs.

Now central banks, from the European Central Bank and the Bank of England to Switzerland and Sweden, are cutting interest rates, making borrowing cheaper, with the US Federal Reserve set to follow suit.

But industry executives and bankers see no quick fix for an industry built as record low rates sent trillions into home ownership, money the sector is now hemorrhaging as bonds and regular savings accounts regain their appeal.

“We’re not out of the woods yet,” said Andrew Angeli, global head of real estate research at Zurich Insurance, a Swiss investor, arguing the sector is unlikely to see a quick recovery.

The past two years of rate hikes have claimed dozens of victims, including property group Signa, which owned trophy buildings in Germany, leaving behind a trail of half-built houses and empty skyscrapers.

Property insolvencies in Germany have risen since the start of 2022, according to consultants Falkensteg, to reach more than 1,100 in the first six months of this year.

The UK construction sector has seen the most insolvencies of any industry for two years running, with around 4,300 in the 12 months to June 2024.

The pain is acute for offices, hit by rising borrowing costs and home working, but the impact extends to the vast property market, which sank in Germany and stuttered in Britain.

“I’ve never worked so hard in my life, and I feel like I have nothing to show for it,” said Brian Walker, president of Pittsburgh-based NAI Burns Scalo Real Estate.

“Some will say … we’re probably at the bottom of the office market, but I don’t know how you can say that,” Walker said. “You’re starting to see a lot of office buildings going back to the bank.”

Cornelius Riese, CEO of DZ Bank, one of Germany’s biggest mortgage lenders, said the higher rates would take three years to work their way through the system. “We’re about two-thirds of the way through the phase where surprises can happen,” he said.

An economic slowdown in many countries, including Germany and China, is adding to the turmoil.

HIGH STAKES

Real estate investment firm JLL estimates that a total of $2.1 trillion in commercial real estate debt globally will need to be repaid this year and next. Borrowers secured refinancing deals to cover nearly a third of that in the first six months of this year, but there could be a shortfall next year of up to $570 billion, JLL said.

Many American investors have handed over the keys to office blocks to lenders, as Brookfield Asset Management (TSX: ) did with New York’s Brill Building, a landmark made famous by singers such as Neil Diamond, who began his songwriting career there. Brookfield did not immediately return a request for comment.

Some small banks, which went all-in as property rose, are now under threat.

Rebel Cole, a finance professor at Florida Atlantic University, identified 62 smaller US banks with huge mortgage loans.

Cole identified a small number of lenders at risk of bankruptcy because they have investments in the largely crippled real estate sector, while relying on funding from large deposits that could be withdrawn at a moment’s notice.

“There is a large amount of maturities … on loans that are going to decline next year,” said David Aviram, co-founder of Maverick Real Estate Partners, a New York-based investor.

That’s putting pressure on banks to offload the loans by trying to sell them, but several, who were offered just 40 percent of the face value of the debt, have backed out of such deals, instead putting the sour credit on the books, Aviram said.

Selling buildings doesn’t get any easier.

Earlier this year, a company liquidator knocked off about 160 million pounds ($209.89 million), or 60 percent, of the previous purchase price of an office tower in London’s Canary Wharf. said a source familiar with the matter, but the sale fell through regardless.

Some believe the banks are in denial. European regulators suspect they may be masking the poor state of lending to the sector by ignoring price falls.

However, waiting could make the problem worse. A widening chasm opens up between buildings in sought-after locations and those in their favor.

In Los Angeles, the Century City shopping district surrounding Fox Studios is doing well, while large areas of downtown are a “total train wreck” with many buildings crumbling and lots of vacant space, said Jeffrey Williams, an investor from New York to Schroders (LON:) Capital.

In Sweden, one of the hardest hit by property ruin, a rate cut still gives hope.

“It’s nicer if … you think there will be low capital costs and property prices will possibly rise,” said Leiv Synnes, CEO of SBB, one of its biggest troubled groups. “The mood … is completely different now.”

($1 = £0.7623)