How Negative Interest Rates Could Hurt European RE

A wave of NPL deals could be in the cards in southern Europe, thanks to negative interest rates. However, investors warned Europe’s real estate markets are in for volatile ride ahead.

Real estate investors could see a wave of large nonperforming loan [NPL] deals come out of southern European banks as financial institutions face a potentially vicious cycle of financial market volatility in the coming months.

Nicholas Spiro, partner at London-based real estate consultancy Lauressa Advisory, has warned there is declining confidence in European central banks’ ability to stabilize markets—not least following the introduction of negative interest rates—which could ultimately impact liquidity in commercial real estate.

That lack of confidence in central bank monetary policies, and negative interest rates, is having an impact on banks’ ability to do business and could spur the clean-up of some European bank balance sheets, not least in countries such as Italy, which has been slow to offload troubled real estate loans and assets.

“We could see a lot more sizeable nonperforming loan deals in southern Europe, and it looks like there is significant scope for that to happen in Italy in the coming months,” he says.

Spiro argues central bank policies, including the European Central Bank’s [ECB] adoption of quantitative easing, have helped distort asset prices in many secondary and tertiary commercial real estate markets and led to a “worrying disconnect” between values and property and economic fundamentals.

But negative interest rates, adopted by the ECB, Sweden, Denmark, and Switzerland, was now leaving Europe’s commercial real estate investment markets “on a much less secure footing” with “waning confidence in banks’ ultra-loose monetary policies [which] have been underpinning sentiment in Europe’s property investment market for the last several years.”

“These are the areas, the non-core locations in southern Europe [such as Italy and Spain] and peripheral markets, where investors have been tempted to move up the risk curve and gotten way ahead of themselves [in terms of pricing and fundamentals].”

From a commercial real estate investment management perspective, though, financial market volatility in the coming months could “help cleanse the market,” he says. “This could be a good thing, a blessing in disguise that helps narrow that gap between fundamentals and market prices in some areas.”

Spiro also accepts that negative interest rates make “higher-yielding property assets that much more attractive”, but he says investors “will become much more discerning and be much more sensitive to underlying property and economic fundamentals” as the year progresses and financial market volatility increases.