The banking sector turmoil sparked by the collapse of Silicon Valley Bank in the US will lead to a tightening of credit conditions and a sharper decline than previously expected in eurozone all-property values this year, Oxford Economics has predicted.
The economic forecasting consultancy warned that the instability in the banking sector, which began with the collapse of Silicon Valley Bank and led to the $3.25 billion purchase of Credit Suisse by Swiss rival UBS, will lead to further contraction in available finance for commercial real estate borrowers.
Oxford Economics has also downgraded its commercial real estate capital value forecasts due to what it sees as a “strong relationship” between changes in credit conditions and property value movements, coupled with a “risk-averse” investment environment that would likely make illiquid asset classes, such as real estate, less attractive.
It now expects values to fall by 10 percent in 2023, following a 3 percent decline during 2022. However, it has also revised its forecast of peak-to-trough all-property capital value falls for the 2021 to 2024 period to 12.6 percent from its previous estimation of an 8.4 percent decline. From 2007 to 2009, during the global financial crisis, the peak-to-trough decline was 8.8 percent.
Oxford Economics said given the “interconnectedness of global capital markets,” any problem stemming from US regional bank lending activity was “likely to have spill-over effects” elsewhere in commercial real estate, particularly impacting transaction volumes and capital raising activity.
“Global credit standards will tighten further in response to the instability in the banking sector,” it said, explaining that prior to the recent turmoil, its data on lending metrics showed the “tightest reading since 2009”, albeit well short of the worst point during the GFC.
But worsening financial conditions since the collapse of Silicon Valley Bank would, Oxford Economics said, likely result, this year, in a “negative credit flow” event – defined as a decrease in the overall amount of credit in the global economy. The commercial real estate sector, it said, looked “particularly exposed” to this, as expectations for tighter lending conditions… [are] already in train”.
The share prices of European banks came under pressure on Friday as the cost of Deutsche Bank’s credit default swaps spiked, causing further concern over the stability of the sector. This came days after Credit Suisse was taken over by US with the help of the Swiss authorities.
Earlier this month, Silicon Valley Bank was taken over by the Federal Deposit Insurance Corporation in the second-biggest bank failure in US history. Two days earlier, Silvergate Capital Corporation, the holding company of Silvergate Bank, announced its intention to wind down operations and voluntarily liquidate the bank. SVB’s collapse was then followed two days later by New York-based Signature Bank’s closure by the FDIC.
Last week, London’s Bayes Business School reported that borrowers in continental European real estate markets are paying all-in interest rates of as much 6 percent for variable-rate loans on prime properties – up from 2-3 percent a year ago.
Rising costs of debt will, Oxford Economics said, further compound value declines for commercial property owners because the market will be less attractive to investors against more liquid investments, such as fixed income. “The pool of buyers shrinks and an aversion to risk dominates, resulting in a tighter definition of a prime asset as lenders and investors shy away from unquantifiable unknowns,” it said.
It argued that the office sector would be most impacted by investors’ risk-aversion.