At Somber Cannes Event, Real Estate Elite Look for Hope Amid Gloom

Damian Shepherd and Jack Sidders
·4 min read

(Bloomberg) -- Bankruptcies, bad loans and slumping values. There has been no end to the symbols of Europe’s property woes over the past year. In Cannes this week, it was a lack of yachts.

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At Europe’s biggest real estate conference, the number of sponsored boats was just a fraction of previous years, when ultra-low interest rates meant big returns and even bigger parties on the Riviera. This week, the mood at MIPIM was more somber, held in the shadow of a market rout after borrowing costs surged.

Still, amid the rubble of collapsed empires and oceans of souring debt, the eternally optimistic dealmakers in attendance showed some defiance. Many insisted they see the seeds of recovery in slower construction.

Soaring costs, plunging sales prices and debt finance that’s prohibitively expensive — if available at all — have shrunk development pipelines and created the conditions for a supply shortage. The optimists’ argument is that if the fabled economic soft landing pans out, where are all those growing businesses and populations going to base themselves if nothing has been built for several years?

It’s a big call to make given that the system is still working through the fallout from the jump in borrowing costs. And even if the supply-shortage theory comes to pass, expect only selective benefits, such as for higher quality office buildings in prime locations.

According to Dean Shapiro, global head of development at Oxford Properties, the ideal development plan is to build in a bad market and hope you’ll have a good market down the line when ready to sell.

“That works when you can build cheaply,” he said. “The problem right now is that construction costs are still very high and the cost of credit is high so you don’t have the same opportunity, but there is definitely going to be a supply shortage. It’s not a bad time to take a risk.”

In Europe, Goldman Sachs Group Inc. said this week that commercial real estate valuations are close to a bottom. Blackstone Inc. President Jon Gray told Bloomberg Television that it’s time to buy real estate. They aren’t alone in seeing price declines easing, or stopping altogether. Such views are supporting the nascent optimism that’s been driven by hopes of central bank interest-rate cuts later this year.

And once the market revives, the supply-and-demand crunch will come into play.

“I think there will absolutely be a supply shortage for the best offices,” said Isabelle Scemama, global head of AXA IM Alts. “And on the residential side, every major city is struggling with a lack of supply.”

Take Germany’s beleaguered office market, where the six largest insolvent developers boast 48 projects in total that would have spanned about 1 million square meters (11 million square feet). Colliers International data show two-thirds of that has since been halted or abandoned.

And as the finances of those projects are thrashed out and potential buyers attempt to make them viable, development pipelines are shrinking.

An analysis of publicly listed office landlords in Europe by researcher Green Street found that plans are about half the level reached back in 2019. It’s a similar picture for warehouse development, where land values have been hit particularly hard.

But it’s in the supply of new housing where arguably the biggest opportunities lie. Homebuilding took a hit across the continent last year; London saw the fewest new home starts in over a decade, and cities across Germany, France and Sweden endured a slump in building permits.

And yet in all those locations, governments are eager to ease shortages and investors see opportunities in new rentals, if only they existed.

“It feels like we are approaching an inflection point in the market,” said Mark Allnutt, executive director at Greystar Real Estate Partners, a private equity firm specializing in rental properties. “Interest rates have peaked, the Bank of England is likely to cut before the general election, and investors are now pushing hard to get things started.”

But it’s still not quite clear if the slump is nearing its end.

Shares of Vonovia SE, Germany’s largest landlord with about 546,000 apartments, plunged almost 11% on Friday. It saw the value of its portfolio plunge by more than €10.7 billion last year, pushing its relative indebtedness above its target range. The rate of decline is slowing, however, with the 4.2% writedown in the second half of the year smaller than the 6.6% decrease recorded in the first.

Earlier in the week, German property firm LEG Immobilien said “the peak of the property crisis is already over.” But a day later, this was the message from another company, TAG Immobilien:

“A question that remains difficult to answer: what are residential properties in Germany currently worth?” it said. “The transaction markets provide little information; volumes have been too subdued in recent quarters. This uncertainty will presumably remain with us for some time to come.”

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