The real estate sector is the most affected of all sectors in Europe

The real estate sector is the most affected in Europe in the second quarter of the year, driven by liquidity pressure, weaker investments, and reduced profitability. Higher interest rates, increased debt repayment costs, and a decline in demand for office space ‘create strong pressure on the market’, states the Weil European Distress Index report.

The study conducted by the law firm Weil, Gotshal & Manges combines data from over 3,750 listed European companies. In the residential market, rising interest rates also affect the availability of apartments, dampening prospects for house prices, according to the report.

The retail and consumer goods sector was the second hardest hit in the region, as the cost of living crisis continued to weaken consumer purchasing power. Meanwhile, troubles in European financial services companies have reached their highest level since October 2020, with a sharp deterioration in market fundamentals leading to overall growth, Bloomberg reported.

The increase is likely to reflect the recent collapse of Silicon Valley Bank and the forced sale of First Republic, raising justified concerns about the risk of ‘contagion’, the research showed.

– The rescue deal for Credit Suisse with UBS, supported by the state, has also raised investor concerns, although the risks appear to be limited for now, the report states.

Inflation in the United Kingdom

Geographically, businesses in the United Kingdom remain in the most difficult situation, as inflation in the country remains ‘stubbornly’ high, and its decline towards the Bank of England’s (BoE) target rate of two percent is slower than expected. Core inflation in May was up to 7.1 percent.

German companies are the second hardest hit, with the highest levels of inflation since November 2020. The increase ‘reflects a weaker than expected recovery of the German economy, which fell into recession in the first quarter of 2023,’ the report states.

In the case of France, the economic challenges there are relatively contained due to extraordinary state support, especially around last year’s energy crisis. As that support has been withdrawn, economic vulnerabilities are expected to become more pronounced, said Andrew Wilkinson and Neil Devaney, partners at Weil’s restructuring office, during discussions with journalists.

In the future, restructurings are expected to arise mainly due to debt maturities, rather than liquidity-raising issues, given that capital structures are quite flexible, Devaney said.

– We will see more companies that cannot refinance under terms that align with their business plan, and the new cost of debt would take away too much money. Before 2008, that was what drove restructurings. We have forgotten what it was like after the financial crisis when bank financing costs were very low and they preferred just to extend maturities – concluded Wilkinson.