TheChek News Flow

City authorities should support the repurposing of offices and retail space

Signs of stress in the commercial real estate sector are now coming thick and fast. This month investors have been spooked by exposures on CRE loan books at lenders including America’s New York Community Bank, Japan’s Aozora and Germany’s Deutsche Pfandbriefbank. The US Treasury secretary Janet Yellen also last week raised concerns over the impact of falling property valuations on the banking system.

Although interest rates are expected to come down this year, the sector remains in a tight spot. An estimated $1.2tn of US CRE debt is maturing in the next two years, according to the Mortgage Bankers Association. Commercial property values have already fallen steeply, and since rates are unlikely to return to previous lows any time soon, developers will still face higher refinancing costs. Meanwhile, increased remote working has hit demand. Office vacancy rates remain well above pre-pandemic levels in cities across the US, Europe and Asia. Loan delinquencies and distressed sales are set to climb.

Regulators are right to monitor the ongoing risk of fire sales and hidden exposures among private lenders. But a widespread contagion through the global banking system seems unlikely. Capital buffers, oversight and loan transparency, while far from perfect, have all improved since the 2008 financial crisis. Some forbearance in contract negotiations and opportunistic investors looking for discounts will also provide a cushion. Instead of a short, sharp shock, a long period of painful adjustment is in store.

As homeworking patterns persist, retail and office buildings in big urban centres will be hit particularly hard. Projections by McKinsey suggest demand for office space will remain below pre-pandemic levels for decades, with at least a 26 per cent drop in the value of office space by 2030 across major global cities. Businesses are already downsizing into higher-quality spaces, and are also redesigning offices. Vacant buildings may lay idle for long periods, and others could be abandoned entirely. Economic activity in some city centres, such as San Francisco — which has a concentration of tech workers — risks being hollowed out.

Urban authorities are not powerless. They can help extract more value from buildings by supporting their repurposing. Office-to-residential conversions are one option, which can also help offset national housing shortages. Mixed-use spaces are another. One Wall Street, in Lower Manhattan’s financial district, for instance, has been redeveloped into condos.

Flexing building use can help revamp cities, cushion price falls and reduce the risk of stranded assets. By avoiding the destruction of entire structures, it is environmentally friendly too. But even with falling prices, it remains costly. Real estate businesses also often cite complicated planning systems, strict zoning laws and building regulations as other factors hindering redevelopment across cities. This is where city authorities can play a facilitating role.

Planning rules and processes should be made more flexible to encourage and speed up repurposing efforts, without compromising building standards. Municipalities can also help by convening with developers, architects and planners to ascertain what is possible, and what additional infrastructure may be needed. The City of London told the Financial Times this week that it would be “flexible” in supporting developers to meet requirements. Imagination is important too: a corporate auditorium could become a cinema by night, while urban labs can support new research districts.

Many buildings will remain unconverted. There are architectural obstacles, and demand depends on neighbourhood quality. But opportunities to eke out affordable living spaces and other commercial activities should form part of urban regeneration plans.

If authorities want to sustain the dynamism of their cities, they must become more agile. The CRE market is resetting. By enabling more buildings to be repurposed, that transition can be made less painful for lenders and investors — as well as urban areas themselves.

Euroclear warns against G7 plan to backstop Ukraine debt with Russian assets

Chief executive Lieve Mostrey says move would trigger similar risks to European financial system as outright seizure

Euroclear has warned that a G7 plan to use Russia’s frozen assets as a backstop to issue debt for Ukraine would pose financial stability risks to Europe.

In an interview with the Financial Times, Lieve Mostrey, chief executive of the Brussels-based central securities depository, said the mooted plan would come “pretty close to an indirect seizing” of the assets and expose the company to legal claims.

Euroclear holds about €191bn belonging to the Russian central bank, the bulk of the €260bn in sovereign assets immobilised abroad in the wake of Moscow’s full-scale invasion of Ukraine in February 2022.

Mostrey warned against a proposal floated by Belgium as a compromise between a US-led push to seize the underlying assets and a more reluctant European stance. The compromise would foresee using the assets as collateral to raise debt and making Russia repay it at a later date or, if it fails to do so, seizing the assets then.

“Using assets that don’t belong to you as collateral is pretty close to an indirect seizing or a commitment to future seizing, which could have exactly the same effects on the markets as a direct seizing,” Mostrey said, adding that this could also expose Euroclear to legal claims over the assets.

“We don’t see how the central Russian bank would simply accept that has been seized and that Euroclear’s obligations towards them have stopped to exist,” she said.

“I trust that the prudent, rational will prevail,” Mostrey said. “When we come to a logic of seizing of assets . . . then you see the trust in the Euroclear system, the trust in the European capital markets, the trust in euro as a currency substantially affected.”

The US has been advocating for seizing the principal assets for Ukraine, but Germany, France and Italy have been opposed, noting that sovereign assets have immunity under international law. They and the European Central Bank have cautioned that the move could undermine the euro by suggesting that assets stowed in euro might not be safe.

“We have to be very attentive to the attractiveness of the euro and the European capital markets for international investors,” Mostrey said.

The chief executive was, however, more favourable to separate plans by the EU to use the profits generated by those assets to help Ukraine, deeming that move as less risky since Euroclear does not pay out interest income to clients and the profits “legally belong to Euroclear”.

Last year, Euroclear earned €4.4bn on reinvesting cash balances from matured securities, such as redemptions and coupon payments, that could not be paid out to Russian clients.

“We understand very well that these revenues only exist because of the fact that there are sanctions,” said Mostrey. “It’s a combination of big numbers and high interest rates that yields these unprecedented amounts.”

Mostrey said that depending on the evolution of interest rates, Euroclear could earn similar amounts in 2024 as immobilised securities continue to turn into cash, or even exceed that amount if rates are not cut at all.

The EU last month agreed to set aside billions in profits from the assets in order to support the reconstruction of Ukraine — estimated at nearly $500bn over the next decade.

“We would accept such a measure,” Mostrey said of plans to seize the profits. “It is . . . our feeling that with regards to these profits, the risk is a bit lower.”

Euroclear is already setting aside the profits, which in 2023 amounted to €3.25bn after tax, as a “special buffer relating to the Russian situation”, Mostrey said. The EU plans to skim off the profits would not affect the 2023 profits.

She added that Euroclear should have the possibility to renegotiate the skimmed-off amounts in case of unforeseen risks flagged by a regulator. “It is simply not possible today to make an affirmative statement that all potential future risks are covered.”

Euroclear is already facing between 50 and 100 lawsuits in Russian courts over the immobilised assets, with the number of cases likely to go up, according to Mostrey. The company has already lost some cases and while it has filed appeals, it is unlikely the outcome will change given Russia considers western sanctions illegal, she said.

“The buffers that we have are clearly strong enough to protect ourselves,” she added regarding the resulting costs.

German financial watchdog rebukes lender and extends mandate of special monitor in latest setback

Germany’s financial watchdog has threatened to fine Deutsche Bank after the lender failed to fix flaws in its anti-money laundering controls, in the latest setback for chief executive Christian Sewing.

Sewing promised to put an end to Deutsche Bank’s long-running legacy of control shortcomings and misconduct scandals after becoming chief executive in early 2018, forking out more than €2bn to improve internal control systems.

Yet the bank on Thursday acknowledged that the improvements to its transaction monitoring systems demanded by BaFin had only been “partially completed”.

The US Federal Reserve fined Deutsche Bank $186mn last year for a “material failure” to fix “unsafe and unsound banking practices” that the bank had promised to resolve as long ago as 2015. In 2022, the supervisory board capped Sewing’s bonus, along with nine other members of the management board, over the delays in improving internal controls.

BaFin said on Thursday that it had extended the mandate of its special monitor, dispatched in late 2018, until October 2024. The monitor’s mandate had been due to end this spring.

“BaFin has ordered specific measures to improve the IT systems used for transaction monitoring,” the watchdog said.

Deutsche will have to pay a fine if it misses the deadline. In late 2023, BaFin dispatched a second special monitor to oversee Deutsche’s German retail banking unit, which was inundated with client complaints after a botched IT update last summer.

It is the second time in less than two years that BaFin has threatened Deutsche Bank with fines over its flawed controls.

The regulator last threatened Germany’s largest lender in late 2022, when it was behind schedule on fixing flaws in know-your-customer controls. People familiar with the matter said the KYC issues had since been resolved and Deutsche had avoided fines.

Deutsche Bank said in a statement that there were “no new findings” in the latest BaFin rebuke and stressed that it “will continue to fully co-operate with BaFin and invest the necessary resources” to meet the deadline.

European aerospace group’s engine supplier Safran also expects material shortages and hiring issues to continue this year

Airbus said it plans to deliver more planes in 2024, cementing its lead over arch-rival Boeing even as the European plane maker cautioned of persistent supply chain challenges. 

Airbus chief executive Guillaume Faury said the European aerospace and defence group was trying to balance resurgent demand from airlines with a supply chain that was a “world of bottlenecks” with a “lot of complexity”.

Airbus, he told reporters in Toulouse, was “trying to find the sweetspot between the demand we have and the many bottlenecks we have”.

The world’s biggest plane maker said it would pay a special dividend to shareholders after net cash exceeded €10bn in 2023. It expects to deliver about 800 commercial aircraft to customers this year — 65 more than in 2023. The company reaffirmed plans to build 75 of its best-selling A320 family of jets a month in 2026.

Airbus is boosting output just as Boeing struggles to contain the fallout from the mid-air fuselage blowout on one of its 737 Max aircraft operated by Alaska Airlines last month. The US aviation safety regulator has stopped Boeing from increasing output of its 737 Max planes while it continues to probe the company’s manufacturing processes.

Faury said the incident was “another reminder [that] we are in a complex industry where quality safety is never a given”.

“It cannot be quantity over quality,” he told reporters. “We want to deliver a number of planes which are of high quality and safe.”

Production lines across the industry have been strained coming out of the Covid-19 pandemic and as global airlines have gone on an unprecedented ordering spree. Problems at engine makers have compounded the challenges.

Faury stressed the company was currently focused on meeting its planned output increase to 75 A320 jets a month in 2026 and was not considering further rises at this point.

The group’s operating profit rose 4 per cent to €5.8bn last year, while revenues climbed 11 per cent to €65.4bn.

However, it offered muted financial guidance for the coming year with adjusted free cash flow expected to come in at €4bn, down from €4.4bn in 2023, sending its shares down in early trading on Thursday. Its shares were trading at about €149, down 1 per cent, in the early afternoon.

While its commercial aircraft business enjoyed a strong year, Airbus disclosed that its defence and space business was hit by charges totalling €600mn. Profits at the division fell 40 per cent to €229mn.

Faury told the Financial Times last year he was not satisfied with the performance of the space business, which has been hit by development delays and faces strong competition from US companies such as SpaceX.

Separately, French engine maker Safran on Thursday echoed Faury’s comments on the supply chain pressures. The company said it was still facing shortages on materials like titanium and other metals and hiring issues in the US, and expected the issues to persist this year. 

But chief executive Olivier Andriès said that the company was in a good position to keep up with the requests from Airbus to increase the pace of engine deliveries.

“We are putting ourselves in a position to meet the needs of Airbus and Boeing in 2024, and we are currently discussing their needs in 2025,” he said on French television channel BFM Business. “We will of course respond, and we will indeed follow this increase in pace.”

Former Browns Buying Director Launches Fashion Agency for ‘Good Eggs’

Ida Petersson is launching creative agency Good Eggs in partnership with Ramya Giangola, who founded Gogoluxe.

LONDON — Ida Petersson, who left the Farfetch-owned luxury boutique Browns as buying director last year right before the loss-making firm was sold to Coupang for $500 million, is moving on with the launch of Good Eggs, a transatlantic brand and creative agency in partnership with Ramya Giangola, founder of Gogoluxe, a New York- and Los Angeles-based consultancy firm.

The agency, which will assume the baton from Gogoluxe, will provide services in brand building, retail development, private label solutions and talent matchmaking.

“Our mission at Good Eggs is to become a destination and partner where our clients can cross-shop across the divisions to tailor the final package to their individual needs,” said Petersson, who has been instrumental in keeping Browns on-trend and relevant since she joined in 2016 from Net-a-porter.

The Sweden-born Petersson added that “being a good egg” not only is one of her favorite sayings but also the impression she wants to leave in the fashion industry.

“We want to be known for doing good — good work, good practices and good energy. An egg also symbolizes birth and new beginnings, which feels apt for the current market and the need for strategic insight to provide real and sustained growth,” she added.

Petersson and Giangola first met in 2017, and it was “love at first sight,” according to Petersson.

“[We were] wearing the same Phoebe Philo era snake print dress, we quickly discovered a common value system, a willingness to take risks and most importantly I found someone who wanted to do good for the industry. Her energy, drive and emotional intelligence know no boundaries and when she asked me to join her venture I jumped at the chance,” Petersson said.

Giangola, who started Gogoluxe nearly 20 years ago, said the partnership with Petersson will provide “a greater array of services to existing and new clients alike in tune with the dynamic and shifting nature of the industry in 2024 and beyond.”

“We are of course stronger together than we are alone. I truly believe that Petersson’s authenticity, integrity, and emotional brilliance coupled with her sharp business acumen and compassion for the planet, people, community and humanity at large makes her one of the most uniquely special people I have ever met,” Giangola added.

Petersson will continue to be based in London, providing localized expertise across the U.K. and Europe while collaborating on global projects, while Giangola will lead the American operation from Los Angeles with her Gogoluxe team being transitioned into Good Eggs throughout 2024.

Prior to the new chapter, Gogoluxe specialized in launching pop-ups worldwide for clients like J.Crew, 3.1 Phillip Lim, Opening Ceremony, as well as retail consultancy and strategy for Lane Crawford, Rosewood Hotel Group, Hudson’s Bay Company, Vakko, The Birla Group, as well as Morpheus and Rainbow Group in Macau.

It has also provided strategic business and creative guidance to emerging brands such as Kika Vargas, Nackiye, Pepa Pombo, Adina Reyter, Agua by Agua Bendita and Silvia Tcherassi.

The aim is for the group to focus fully on its nutrition, health and beauty businesses.

PARIS – DSM-Firmenich intends to spin off its animal nutrition and health business in order to focus fully on nutrition, health and beauty.

Carving out the activity allows the group to minimize its exposure to volatility in the vitamins market, which has been faced with unprecedented cyclical pressure on pricing in the animal segment, and decrease capital intensity in line with the group’s long-term strategy. All separation options will be considered, it said.

DSM-Firmenich’s Veramaris and Bovaer businesses are to remain within the company.

The market smiled on the news, with DSM-Firmenich trading in Amsterdam up 13 percent to 105.20 euros at 12:15 p.m. CET.

“Our purpose at DSM-Firmenich is to bring progress to life, as we boost innovation in premium, high-growth and resilient segments,” Dimitri de Vreeze, chief executive officer of the company, said in a statement. “ANH is a fantastic business that over the years we have built to be a true leader in the industry. This is a difficult moment, but we strongly believe that a separation would be better for both businesses and their employees, and ultimately generate better value for all our stakeholders.”

Kaiseraugst, Switzerland-based ANH generated more than 3 billion euros in revenues last year. It counts about 6,000 employees.

DSM-Firmenich plans to focus on its perfume and beauty, taste, texture and health, and health, nutrition and care activities, and develop further its scientific research, technology and manufacturing.

“Full focus on these businesses is expected to enhance their commercial potential and synergies, supporting an attractive and consistent growth outlook alongside robust margins,” the company said.

DSM-Firmenich said it remains confident that cost reduction can contribute 100 million euros in adjusted EBITDA this year, and that it will realize the full benefit of 200 million euros in 2025.

The company also on Thursday reported its full-year 2023 results. DSM-Firmenich net profit rose 26 percent to 2.15 billion euros on sales that grew 27 percent to 10.63 billion euros.

Firmenich and DSM merged in May 2023 to become the leading fragrance, beauty, well-being and nutrition supplier.