High Debts on These Properties: Investors Flee for Safety The White House pokes fun at Fox News

In interest rate reversals, it is as if several explosive charges were detonated at the same time, but the fuses were of different lengths. There was an initial explosion due to high losses on US Treasury bonds. As a result, several banks went bankrupt in the US and Credit Suisse in Switzerland at the same time. It’s been quiet since then. But a second fuse could lead to the real estate companies that have invested a lot of money in office buildings. The World Bank warns that the banks are already on the run, and the financial news service Bloomberg headlines “a new wave of real estate problems”.

European real estate companies have outstanding debts of 165 billion Swiss francs that they must renew between 2024 and the end of 2026. And this at interest rates that are currently much higher. This can end lightly or with defaults and value adjustments. In any case, the financial markets have not even waited to see how it will turn out, but have long fled from safety.

This flight is evidenced by a slump in the share prices of European real estate companies. They are worth $148 billion less today than at their peak, Bloomberg writes. A good example of this crash is the Swedish real estate company SBB, whose shares have lost almost 90 percent of their value so far.

Investors rush for the exit

As in Europe, so in the US. US banks are “rushing to exit the office real estate market,” reports the Financial Times. The banks would sell debt securities of the sector, even if interest had been paid on time until now. They are in such a hurry that they sell the newspaper, even if it means losing money. The main thing is that they get away quickly.

Office real estate as a scene where a bang could come – that’s how the World Bank sees it too. The multinational development bank warns that this could even lead to a systemic banking crisis. Before the reversal in interest rates, the industry accumulated heavy debt, making it particularly vulnerable to high interest rates. This, in turn, could be fatal for those banks that have issued a particularly large number of loans in this area.

In any case, many banks already have weak balance sheets, the World Bank writes in a report. It is the result of an interest rate turnaround that has not yet been completed, but has already taken on unusual proportions. Many regulators were also surprised. When calculating the impact of higher interest rates on banks’ balance sheets at low interest rates, they assumed much smaller interest rate reversals.

A new chapter will be written in the interest rate reversal this week. In the US, the Federal Reserve Bank has not raised its policy rate any further. However, Fed Chairman Jerome Powell indicated that he was merely taking a break and that further rate hikes could be expected this year. For a long time, the financial markets thought that the peak would be reached next July and that interest rate cuts would come soon.

And for the eurozone, the European Central Bank is expected to go up again on Thursday, its key interest rate is currently still at 3.75 percent. The head of the ECB, Christine Lagarde, is likely to repeat her mantra one more time: “We’re not done yet”. Concerns and trepidation remain about how quickly central banks will get inflation under control and how long they will have to keep interest rates high.

Switzerland is being pulled down with it

Office real estate is seen as a risk for which it is better to be safe – and the financial markets are not prudish, as they always are in such situations. They distance themselves from anything that somehow fits the same pattern. For example, listed real estate funds are being phased out. Especially those with office buildings, but also those with apartments have fallen sharply in value. And the shares of Swiss real estate companies are also suffering from the fear. This is evident from the comparison with the Swiss Market Index.

The leading Swiss index initially reached a new record after the corona crisis, but has since struggled with interest rates. Compared to the beginning of 2020, the SMI still shows an increase of 4.5 percent. On the other hand, the share of PSP Swiss Property is more than 25 percent lower than then, and that of Swiss Prime Site is even 30 percent lower. It could have been worse. The markets seem to have even less confidence in European real estate companies. The industry index Euro Stoxx 600 is down 40 percent.

However, what is causing markets to flee is not just the uncertainty about the value destruction that the reversal in interest rates may bring. The real estate companies are also mathematically worth less in a world with high interest rates. Your future profits should be discounted to the present at a higher rate; and these gains are also greatly reduced by the higher interest expense.

Swiss real estate companies are considered better positioned than those in Europe. They have taken on less debt and their real estate is valued more cautiously. But that is of little use to them, as is known in financial market circles. Analysts in London, who don’t know Switzerland very well, are crucial. If the market mood is bad, it matters little what is different in Switzerland from abroad. (aargauerzeitung.ch)