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Dealmaking and valuations in European commercial real estate (CRE) continue to weaken amid high interest rates and slowing growth. There seems to be no letup coming anytime soon for rates, as inflation in some of the EU’s biggest economies remains persistently sticky. EU banks are generally less exposed to CRE than US counterparts, but it is more complicated on a country-by-country basis.

Interest rate risk is particularly troublesome in nations like Sweden, which carries a large share of variable rate mortgages. Combined, the UK, France, and Germany may see one in five of every five commercial mortgages face refinancing challenges by 2025.

Related ETF: iShares European Property Yield UCITS ETF (IPRP), iShares MSCI Europe Financials ETF (EUFN)

A pummeling of commercial property valuations and investment is now biting many economies throughout the European Union. MRP has written at length about a deepening rout in commercial real estate (CRE) throughout the US, which caused property prices to fall for the first time in over a decade last quarter. Similarly, European commercial real estate investment fell to its lowest in 11 years in the first quarter of 2023, according to MSCI Real Assets. These declines have been heavily concentrated in office buildings, Europe’s largest real estate sector, where quarterly investment fell to a record low, while the volume of transactions slumped to a 13-year low of €10.8 billion.

The primary culprit for the steep drop-off is slowing growth, triggered by rising interest rates, as well as the expectation that there are more hikes to come. An additional factor that is particularly negative for office buildings, but does impact retail properties to some degree, is work from home arrangements. Though it appears Europeans are returning to office more quickly than Americans, a 2023 European Central Bank (ECB) study, cited by Reuters, showed that nearly a third of Eurozone workers want to work from home more frequently than their employer allows them to, and are willing to…

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