By Anna Hirtenstein
Europe's downtown office buildings are empty, and malls and main
streets are deserted, yet the biggest landlords are staying afloat
during the Covid-19 pandemic thanks to robust central-bank buying
of bonds backed by property debt.
Some worry that the policy is obscuring long-term pain should
workers and shoppers never return in their pre-coronavirus
Shares in Unibail Rodamco Westfield SE, one of Europe's largest
commercial real-estate investment trusts and the owner of malls,
offices, hotels and exhibition centers, are down by more than 50%
from this time last year.
Unibail's debt, however, is holding up fine. The yield on a
5-year bond issued by its real-estate development business was at
1.67% on Tuesday, more than a full percentage point lower than a
year earlier. The European Central Bank last bought bonds issued by
Unibail in the week of Jan. 8, according to public filings.
Commercial real estate is among the top sectors expected to
deteriorate in 2021, according to a survey from the European
Banking Authority. New loans to the hardest-hit parts have slowed
and become more expensive, lenders said.
"We've seen a decline in all activity in 2020, in both investing
and lending to commercial real estate," said Annette Kröger, head
of Allianz's real-estate business in northern and central Europe.
"But given the interest-rate environment and the high liquidity in
the market, it has held up despite the world we're operating
The ECB, like the Federal Reserve, launched extensive relief
efforts in the wake of Covid-19 economic lockdowns. In addition to
buying corporate bonds issued by property developers, it has
supported commercial real estate by being a huge buyer of covered
bonds, a popular type of debt instrument in Europe issued by banks
and backed by a pool of loans made to commercial and residential
Banks generally sell covered bonds to investors. They are often
rated AAA since they are backed by both the banks and the
underlying collateral. If any of the loans supporting the bonds go
into default, the bank replaces the loan with a new, performing
The ECB snaps up covered bonds in the open market as part of its
bond-purchasing program. At the end of 2020, the ECB held more than
EUR290 billion of covered bonds on its balance sheet, equivalent to
$350 billion. It bought another EUR214 million in the first week of
The ECB can also take them as collateral from banks in exchange
for ultracheap funding. Banks last year created mountains of a
flavor of "retained" covered bonds that are used exclusively as
collateral for ECB loans. It also held another EUR630 billion as
collateral, up from EUR380 billion at the end of 2019.
The retained covered bond supply nearly tripled among German
banks in 2020, according to research from BBVA. The use of covered
bonds as collateral for ECB loans across Europe rose more than 60%.
An ICE index of euro-denominated covered bond spreads, or extra
yields over Treasurys, hit a five-year low Jan. 6.
"This is definitely supportive for the mortgage markets in
Europe," said Agustin Martin, head of European credit research at
BBVA. "But it's very disconnected from real market conditions."
The pandemic's long-term impact on property is a key question.
Barclays estimates that around 60% of people now expect to work
more from home in the post-Covid-19 world and predicted that office
demand will fall up to 20%.
A similar dynamic is playing out for bricks-and-mortar stores,
which came into the pandemic already weakened by the shift to
online shopping. Arcadia Group, a British fashion empire, collapsed
into administration, a process similar to bankruptcy, in late
November. Its stores are shopping-mall mainstays.
"There are more bankruptcies expected, and the demand for
physical retail space is likely to decline further," said Vincent
Fokke, head of listed real estate at Dutch pension fund APG.
Henrik Stille, a portfolio manager at Nordea Asset Management,
has sold covered bonds that have collateral consisting of more than
10% commercial mortgages. These bonds aren't trading at
substantially higher yields than those with more exposure to
residential mortgages, which are considered to be lower-risk, he
A Danske Bank covered bond backed by commercial mortgages traded
at minus 0.32% on Tuesday. A similar bond from Danske Bank that is
linked to a collateral pool containing only residential mortgages
was at minus 0.47%. The spread, or difference between the two,
narrowed in the past 12 months to 0.15 percentage point, from 0.23
point last January.
"When you don't get compensation for something that really has a
larger risk, then it's better to avoid it," Mr. Stille said.
Write to Anna Hirtenstein at email@example.com
(END) Dow Jones Newswires
January 20, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.