Behind the Shiny Facades: René Benko, an Austrian property billionaire, built a massive empire with the Signa Group, owning renowned properties like London’s Selfridges and New York’s Chrysler Building. His strategy heavily relied on low borrowing costs, amassing a property portfolio worth €27 billion. However, this approach also accumulated a staggering €13 billion in debt, leveraging the era of cheap money to expand aggressively.
The Era of Easy Money: Signa’s growth strategy worked well when interest rates were low. Cheap financing was the norm, and property businesses thrived in this environment. However, as the narrative shifts with rising interest rates, Signa and similar companies face a harsh reality. JPMorgan notes that at least €4 billion of Signa’s debt is subject to these fluctuating rates, making them vulnerable in the current economic climate.
The Crumbling of an Empire
Administrative Woes: The central company of the group, Signa Holding, filed for administration last week, marking a significant downturn in its fortunes. This move signals deep trouble not just for Signa but reflects a broader distress in the global commercial real estate sector, valued at several trillion dollars.
A Cycle of Reckoning: Alex Knapp of Hines, a global private real estate investor, compares the current market reset to significant downturns in history like the early 1990s or the global financial crisis. This “big one” represents a stark departure from the previous decade’s low-interest-rate environment.
The Broader Impact on the Market
A Shift in Asset Valuations: With the end of ultra-low interest rates, property owners across the board, from small businesses to large corporations, face rising interest bills and dropping property values. This necessitates a scramble for cash to manage debts.
Trouble Across Europe: Various European property groups are in distress. Swedish landlord SBB made a deal with Brookfield for funding amid bondholder pressures. Germany’s Adler Group narrowly avoided insolvency, highlighting the widespread nature of the problem.
Unrealised Losses and Stalled Deals: About 50% of London’s commercial real estate assets are now valued less than their purchase price. In New York, the situation is slightly better but still challenging. With official valuations lagging and a significant drop in completed deals, the market is in a state of flux.
The Real Estate Reality Check
Refinancing Challenges: Not all properties are equal in the face of this downturn. Assets with good rental prospects, like warehouses and residential buildings, may find refinancing easier. However, others, especially those loaded with debt, face a grim future.
The Changing Lending Landscape: Alternative lenders have become more prominent since 2009, providing some relief. However, Signa, facing €1.3 billion in loan maturities, struggled despite efforts to negotiate with lenders and seek new investors.
A Crisis in North American Offices: The office market, particularly in North America, faces a unique crisis combining decreased demand, outdated infrastructure, and the broader downturn in real estate. This situation is likened to a “little global financial crisis” for secondary office spaces.
The European Perspective
Germany’s Particular Predicament: Germany, and specifically Signa’s troubles, exemplify the intensifying storm in Europe’s real estate market. Despite these challenges, some optimism remains, fueled by recent market shifts and the hope that the downturn might be shorter than anticipated.
Adapting to a New Normal: Real estate veterans acknowledge that the industry has historically coped with higher rates. The current challenge lies in adjusting to a significant shift after a prolonged period of unusually low borrowing costs.
In summary, the dramatic fall of Signa Group underlines a pivotal moment in commercial real estate, marking a transition from a period of easy money to one where rising interest rates reshape the landscape. This shift has broad implications, affecting property values, investment strategies, and the future direction of the real estate market.