Buildings in a financially dangerous zone – Newspaper Kommersant No. 59 (7504) dated 04/06/2023

In the commercial real estate market in the euro area, specialized investment funds are now definitely playing a major role, occupying more than 40% of the market. The review of the European Central Bank (ECB), dedicated to the role of collective investment in real estate, discusses a new situation for Europe in this market – the professionalization of investments in this area and carries risks that were previously realized in the US and Asia, and stabilizes European financial and real estate markets: this was well illustrated by the strong stress of 2020, which, according to the ECB, was overcome in 2022 largely thanks to such investment funds.

The ECB released the report “The Growing Role of Real Estate Funds (REIFs) in the Euro Area Real Estate Market: Risks and Regulatory Approaches” by a group of in-house economists as part of its Macroprudential Bulletin. The subject of discussion is formally not so much the actions of REIFs, but the potential consequences of the development of their business for the financial system of the euro area and, apparently, even wider – the European Union and its partner countries. The main purpose of the publication is to confirm that the role of such funds, which in 2013 was a noticeable, but not a determining factor for the European real estate market, has finally become a key one: by the end of 2022, REIFs own a little more than 40% of the commercial real estate market in the euro area, in 2013 this figure was 20%. Between 2014 and 2021, with the progressive growth of the entire market, which in 2022 exceeded €1 trillion in asset value for the first time, the share of REIFs was unstable, but it is now more or less clear that these funds are and will be in the future the most influential player not only this real estate sector, but also the market as a whole, since the less structured and centralized segments of residential and industrial real estate are largely associated with them, and, in fact, proof of the resilience of this role of REIF is the market downturn due to the COVID-19 pandemic in 2021, followed by a super-fast by the standards of this industry recovery.

The success of the REIF for the ECB is more of a problem than an achievement: the professionalization of the commercial real estate market at a level previously characteristic of the US, UK and certain Asian markets provides new answers to the question of how sustainable investment in European property in general, whether macroeconomic shocks can in other sectors of the financial market to “drop” prices for real estate, primarily commercial, and whether autonomous crises in real estate markets in Europe can provoke generalized financial crises.

REIFs are more mobile and more prone to various “infections” institutions that quickly influence the market situation in comparison with a mass decentralized owner.

While there is no unity in the structure of the market in relation to the role of REIFs in Europe, the markets in Portugal and Italy, where such funds play a major role, the market of the Netherlands and the Finnish market are fundamentally different, while the trend towards internationalization of REIFs in the euro area is quite distinct.

Economists have traditionally viewed REIFs as institutions that stabilize real estate prices, and the experience of 2021 has shown this. However, for the ECB, another, clearly frightening aspect of the problem is important: the growth in the importance of funds is associated with a sharp increase in volatility in all real estate markets, especially at the end of 2022, when the market began to fall with a 44% year-on-year increase in the number of REIF transactions with its assets, and in all real estate markets in the EU, except for Greece, there was a strong correction.

At the same time, in contrast to the markets of the USA and the British world (in the case of the euro area, Ireland, a country of the euro area, is also exciting), the degree of securitization within the REIF is limited and significant only for France.

The ECB is clearly worried about the new situation, where the crisis in the euro area is quite conceivable, under a number of assumptions, as a distant analogue of the recent US “mortgage crisis”: the ECB has limited ways to counter this kind of instability.

Dmitry Butrin