Office landlords face £34bn cash crunch in Europe as staff shift to working from home

Banks are restricting their lending amid falling valuations and higher interest rates

Office landlords are facing a £34bn cash crunch in Europe as staff shift to working from home, economists have warned.

High interest rates and a slump in office values after the pandemic mean Europe’s commercial real estate sector will be hit by a funding shortfall between 2023 and 2026, according to S&P Global Ratings.

Analysts have predicted that office landlords will receive £34bn less from banks over the next three-year period, compared to the amount received by the sector between 2018 and 2021.

Plummeting valuations and higher borrowing costs mean banks are slashing the amount they are prepared to lend on commercial real estate, which has left some landlords scrambling for other sources of funding.

Paul Watters, S&P’s head of European corporate research, said the shift to homeworking has driven up vacancy rates across European city centres and “clearly been an issue in the City”.

S&P has forecast an 11pc drop in Europe’s office values from the second half of 2022 to the end of 2024, having so far recorded a decline of 5.8pc.

If landlords are forced to sell their assets, values could plunge further, Mr Watters said: “The risk is that you start seeing disorderly sales. Given the lack of liquidity in the marketplace, that could start to upset the applecart of valuations.”

Falling commercial real estate values will expose banks to losses, S&P warned.

Lenders in Germany, the Netherlands and the Nordics will be the most exposed, analysts added, as they have particularly large books of commercial real estate loans.

S&P tracked loans issued in the four years to 2021 across major European countries, including the UK, France and Germany.

Analysts said the biggest impact will be felt in 2025 and 2026 as more loans mature.

Mr Watters said there will be an £80bn funding gap across the entire commercial real estate industry, with £34bn emerging in the office sector and £21.6bn across retail.

Alongside commercial real estate, the consumer goods and media and entertainment sectors will also be hit, S&P said.

Overall, S&P expects the corporate default rate in Europe to rise from 2.9pc to 3.75pc.

This will be the highest rate since March 2021 when defaults peaked at 6.15pc.

Excluding the pandemic period, the previous high was 5.7pc in June 2010 after the financial crisis.