real estate Europe

 

On August 15, Bloomberg reported that asking prices in the UK fell at their fastest pace in two and a half years. Homes in London saw the largest declines, with the most expensive homes enduring the largest drops. According to property development company Rightmove, buyer inquiries have dwindled, listings have multiplied, and average mortgage payments for a first-time homebuyer with 10% down just crossed £1,000 for the first time in history. On an annual basis, the price of new homes across the UK is still growing at 8.2%, but these mounting headwinds will soon be blowing prices in the opposite direction.

Commercial property is another sector that shows the early symptoms of an epic collapse. "A number of big-ticket property deals have been pulled in recent months," reported the Financial Times on August 8. One especially large deal that got scrapped "consisted of 16 warehouses spread around England, which private equity firm KKR and logistics investor Mirastar had been hoping to sell for more than £800 million." Meanwhile, demand for London office space is down about £3 billion since December 2021, and Germany has undergone a "particularly marked decline in real estate investment market volume." (FT, 8/8/22)

In July 2022, the Elliott Wave Theorist said this about housing as an investment:

This invest-to-rent craze is going to die a long, slow death. People buy investments for return, and when the return shrinks, or perhaps even reverses to become a net cost, companies will slowly crawl away from the landlord business.

In Europe's hottest property markets, the fatalities should start popping up soon. The August 15 Financial Times published a version of this chart comparing real estate funding costs (yields on German bunds plus credit spreads on real estate bonds) against office income in Frankfurt and Paris.

 

For more than a decade, office space generated enough income to exceed the cost of raising capital. The calculus, however, flipped this year with office income stagnating around 3% and real estate funding costs pushing toward 6%. Perhaps you can guess the last time this dynamic occurred? It was 2007, a monumental year that saw peaking global stock indexes and a widespread property bust that eventually set records. This year is on a similar trajectory.