Real estate, real estate funds in the spotlight

In recent days, the European Central Bank has dwelt on the risks that could arise in Europe for the entire financial system due to the Reifs (Real Estate Investment Funds), which collectively manage real estate assets in the Old Continent worth about 1 trillion euros. The International Monetary Fund spoke of the risks of an overvaluation of the brick market in Europe, a phenomenon that must be kept under control.

Driving up the risk thermometer is the change of scenery on the interest rate front. In past years, when the cost of money fell to historic lows, the real estate sector traveled with the wind in its sails. Residential and commercial land prices have risen consistently, buoyed by particularly tonic demand and cheap mortgages. A contribution to growth also came from real estate funds, which were able to borrow on favorable terms to make investments.

Now, however, the horizon has radically changed. Between 2021 and 2023, central banks quickly raised interest rates to stop inflation, and real estate funds no longer had the "fuel" to make investments. As if that were not enough, the overvaluation of real estate can pop a price bubble that, should it burst, would cause funds' assets to lose value at a great rate, exposing them to the risk of a liquidity crisis (i.e., the risk of not having enough money to meet the redemption demands of unitholders).

The one just described is obviously an extreme scenario. But it is undeniable that in some European countries brick prices have already reversed sharply. This is the case in Sweden, where prices have dropped by as much as 15 percent in a short time. If there were to be a deflation of prices by more than 20 percent across Europe, for the IMF there would obviously be no shortage of consequences for the banking system, which is the big lender to buyers of real estate (which is then placed as collateral against borrowers' defaults).

This, then, explains why the dynamics of the real estate sector are in the spotlight of international bodies.

Interest rates have also risen greatly in the United States, and it should not be forgotten that today the real estate fund industry is now articulated on a global scale. It is no coincidence that the ECB, in its analysis, cited the case of the Blackstone Real Estate Income Trust (Breit), a real estate fund of the U.S. Blackstone Group that has come under stress in recent months, with redemption requests of more than $4 billion. Mostly Asian investors wanted to see the shares, although the fund's assets are largely located in the United States in cities such as Las Vegas, Atlanta and Dallas, where brick prices have been on a downward trend.

Then there is the case of China. There, the brick market has been a major ailment already in years past due to a bubble that culminated in the crisis of Evergrande Group one of the largest real estate players in the People's Republic. The crisis prompted the central bank in Beijing to implement a non-restrictive monetary policy, unlike the central banks in Europe and the United States. Recently, after months on the brink of collapse the Chinese real estate market has shown tentative signs of recovery but remains a special watch.