Real estate has been identified as the most distressed sector in Europe amid liquidity pressures and weakening investment, according to the latest figures from Weil Gotshal & Manges.
The law firm’s latest quarterly European Distress Index, which analyses more than 3,750 listed European corporates, found distress across European real estate firms have risen significantly over the past year.
Key drivers also included squeezed profitability.
Weil said factors, including rising interest rates, higher debt servicing costs and structural changes in the labour market causing a fall in demand for office space, are putting intense pressure on the market.
Ongoing pandemic trends, particularly hybrid working, higher borrowing costs and lower expectations of capital appreciation, have also contributed to challenging conditions.
In the residential market, rising interest rates are denting housing affordability, softening the outlook for house prices.
Following real estate, retail and consumer was named as the second-most distressed category among European markets.
Geographically, the UK was the most distressed major market in Europe, with researchers pointing to “markedly higher” levels than France, Spain or Italy. Weil said distress among UK corporates rose on the previous quarter and is “significantly above last year’s levels”.
Researchers said UK-based corporates continue to face significant headwinds from high inflation, rising input costs, escalating interest rates and pressure on operating costs such as labour, utilities and logistics. The costs of servicing and raising debt have also risen.
Elsewhere, distress across European financial services firms was driven to its highest level since October 2020, with a sharp deterioration in market fundamentals driving the overall rise.
Neil Devaney, partner and co-head of Weil’s London restructuring practice, said: “The cracks are continuing to emerge in the real estate market, both from a commercial and residential perspective.
“Whilst leverage has always been a central feature of commercial real estate, recent bank failures have added to fears that credit will become less available and more expensive.
“This, coupled with a sharp fall in property prices and structural changes arising from the pandemic, has been causing headaches for corporates. We’re also seeing certain markets facing further pressures – such as in the UK, where mortgage rates have soared.”
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