Real estate companies across Europe have seen levels of distress rise significantly on last year and on the previous quarter, according to the latest Weil European Distress Index.
The index, which measures corporate distress across a range of sectors across Europe, said that increased risk metrics, weaker valuations and lower levels of liquidity, amid an outlook of rising interest rates and lower expectations of capital appreciation, had pushed real estate companies to be the second most distressed market in Europe, after retail and consumer.
Its survey of more than 3,750 listed European companies found real estate had not experienced the level of distress it faces today since 2012.
Corporate distress has accelerated faster in the UK than in the rest of Europe and is now at a two-year high, with the main drivers continuing to stem from weaker investment metrics, tighter liquidity and ongoing pressure on profitability.
The UK’s relative weakness can be partly attributed to both Brexit and the pandemic. Since the UK left the EU in January 2020, corporate distress has closely tracked the rest of Europe. However, this has changed in recent months, as economies adapt to the twin shocks of the pandemic and War in Ukraine, and Brexit has had demonstrable effects on UK supply chains, which had been largely created by non-tariff barriers to trade.
There is also growing evidence to suggest that the UK economy has suffered disproportionately from the effects of the pandemic. The level of UK GDP compared with pre-Covid is down by 0.7%, compared with the euro zone which is up by 2.1% and the US which is up by 4.2%.
Neil Devaney, partner and co-head of Weil’s London restructuring practice, said: “The last quarter has been a hugely disruptive period for UK businesses. The fiscal response in November has restored some confidence and stability, but above average inflation, decreasing productivity, declining trade and acute labour shortages have only added to the many global challenges which the UK economy is facing.”
He added: “The operating environment has been dominated by the pandemic and war in Ukraine in recent years. As businesses throughout Europe adapt and emerge from these challenges, we should get a better sense of the impact Brexit has had on corporate distress levels than would otherwise be the case. This is something that we’ll be monitoring closely in 2023.”
Retail and consumer goods companies are the most distressed across all sectors, said Weil, as decade highs in inflation and rising interest rates squeeze household incomes. Distress for industrials has also continued to rise, driven by a deterioration in valuation metrics, weaker profitability and poorer investment metrics according to the latest data.
Andrew Wilkinson, senior European restructuring partner and co-head of Weil’s London restructuring practice, said: “While the latest retail figures report a slight increase in sales, this will provide little respite for retail and consumer goods companies as they head into what has traditionally been a golden quarter for the sector. The combination of persistent inflation and weaker demand could give rise to an uptick in defaults in the new year.”
However, he said that due to increased borrowing costs, a correction in real estate is underway.
Wilkinson added: “With central banks telegraphing more hikes to come, and with recessions forecast throughout Europe next year, the re-adjustment will take many months to play out. The UK could see the steepest falls, as institutional investors sell illiquid assets to rebalance their portfolios following the liability-driven investment crisis.”
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