Transcript: Is Signa’s downfall a canary in the coal mine?

This is an audio transcript of the FT News Briefing podcast episode: ‘Is Signa’s downfall a canary in the coal mine?’

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Marc Filippino
Good morning from the Financial Times. Today is Wednesday, December 13th. And this is your FT News Briefing.

Westminster has taken a step towards sending asylum seekers to Rwanda. And the latest inflation data out of the US is keeping the Federal Reserve in a bit of a holding pattern. Plus, the FT’s Sam Jones talks about the collapse of one of Europe’s biggest property developers, Signa. 

Sam Jones
A lot of banks are worried about what this means for commercial real estate in Europe as a whole, and whether Signa is a sort of canary in the coal mine. 

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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UK Prime Minister Rishi Sunak got a much needed win on Tuesday night. 

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The Ayes to the right — 313. The Noes to the left — 269. So the Ayes have it. The Ayes have it. Unlock. (Cheering crowd)

Marc Filippino
The House of Commons voted to back a controversial bill that would send asylum seekers to Rwanda. But it wasn’t always a sure bet that Sunak would get the votes he needed. He had to really convince quite a few of his own Conservative party members to get behind the legislation. After the pleading by Sunak, though not a single Tory MP voted against it at the second reading. But 38 Tory MPs either abstained or were absent from the vote. The Labour party says that it will scrap the scheme if it wins next year’s general election.

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The US reported inflation numbers for November yesterday, and prices edged down slightly last month. So high interest rates are still working. But how much longer will interest rates need to stay high? The Federal Reserve meets today, and while it doesn’t seem like the central bank will be adding another rate rise, it’s also unlikely that yesterday’s inflation data is enough to spark talks about cutting rates either. Here to talk about all this is the FT’s Claire Jones. She’s our acting US economics editor. Hey, Claire. 

Claire Jones
Hi there. 

Marc Filippino
All right. So, Claire, what’s behind the numbers in yesterday’s consumer price index report? 

Claire Jones
So the CPI report yesterday showed a very slight decline in annual US inflation. The headline figure fell from 3.2 per cent to 3.1 per cent. And the core figure, which is seen as a better bellwether of longer-term inflationary pressures, remained flat at 4 per cent. So this somewhat speaks to what central bankers have been saying recently all around the world, that the last mile of fighting inflation is gonna be the most difficult. We’ve seen quite sharp falls in price pressures over recent months. But getting inflation down from around the 3 per cent mark to central bankers’ targets of 2 per cent is gonna be quite tricky. 

Marc Filippino
Yeah, but investors, they’re already pricing in rate cuts for early next year. What do you think Fed chair Jay Powell is gonna say to that after today’s meeting? 

Claire Jones
Powell has warned about this last mile. He’s described the disinflation process as something that’s likely to be lumpy and bumpy. So I don’t think you’re gonna see Powell today make a clear signal that the Fed is about to cut rates as soon as the spring, which is what a lot of people in markets are expecting. 

Marc Filippino
Gotcha. So, Claire, we have two other central bank meetings this week. We’ve got the European Central Bank and the Bank of England. Where are they when it comes to rate cuts? 

Claire Jones
My best bet is that the Bank of England will end up cutting rates after the Federal Reserve. Where there’s been some change in expectations of late has been with the European Central Bank. I think markets did think that the European Central Bank would end up cutting rates after the Fed, but a lot of investors are now pricing in cuts for as soon as March. Now, I talked to my colleague in Frankfurt, Martin Arnold, and he thought the March expectation was too optimistic. But nevertheless, he emphasised that while policymakers will want to see wage growth in the eurozone falling and more solid signs that inflation will steadily hit their target of 2 per cent, that there has been some shift and that, you know, we should expect rate cuts in the eurozone around about the kind of like early summer mark, around June maybe. 

Marc Filippino
OK. So it’s not a matter of if, but when central banks cut rates next year. Is there anything that could derail that timeline? 

Claire Jones
I do think, as you say, it is a question of when. At some point, definitely in the second half of 2024, most people think that we are likely to see all three of these central banks in loosening mode. I think what will stop that happening would be another surprise inflationary shock. That doesn’t look likely at this juncture. But who knows? 

Marc Filippino
Claire Jones is the FT’s acting US economics editor. Thanks, Claire. 

Claire Jones
No problem at all. 

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Marc Filippino
Signa group was one of Europe’s most prominent property developers. That’s Signa with an S, not a C. It owns stakes and trophy assets like Selfridges in London and New York city’s Chrysler building. To fund its rapid expansion, the group’s founder, René Benko, racked up an enormous amount of debt. He did this at a time when interest rates were super low and it was cheap to borrow. So when the group collapsed two weeks ago, it sent shockwaves through Europe’s already shaky commercial real estate sector. Sam Jones has been covering the unravelling of the group and he joins me now. Hey, Sam. 

Sam Jones
Hi there. 

Marc Filippino
All right. So, Sam, give us a picture of the way Austrian property billionaire René Benko built his empire. 

Sam Jones
Benko is a sort of interesting guy in that he’s an almost entirely self-made billionaire. He was very good at spotting value in unloved properties. But crucially as well, he was also very good at raising money. And so having started fairly modestly with apartments in Innsbruck, it was not very long at all before he was able to buy the largest store in the city. And from there, he went to Vienna and the empire grew and grew and grew to the point where in 2019, Signa made a profit of €1bn for Benko as its largest shareholder, and owned many of the biggest and most important department stores and luxury pieces of real estate around Europe. 

Marc Filippino
OK, so then what caused Signa to collapse? 

Sam Jones
Well, one of the most surprising things about Signa is its complexity. So for a company that does something relatively straightforward — buy, do up and sell or keep a property for rental — Signa had over 1,000 different corporate entities to manage this process. Now, Signa has also taken on a lot of debt to fuel its rapid expansion. You add into that questions about René Benko the founder’s own probity caused by a series of legal scandals in Austria, and a sort of general wariness among banks for getting involved with clients that might land them in reputational problems. And there was a huge financial crunch facing Signa. Now in 2023. Signa had to pay off 1.3bn of debts and it had barely any new capital coming in. Then, of course, you overlay all of that with the downturn in luxury spending and in commercial real estate and the impact of rising interest rates. And really, it was a perfect storm for the group. 

Marc Filippino
Yeah, but, Sam, lots of other property companies borrowed heavily when interest rates were super low, and they’re now getting hit with high interest rates, too. Is Signa any different from them? 

Sam Jones
Signa was certainly unique. It’s a very complicated example of a property company and it had a lot of debt and it used some very aggressive financial engineering. But a lot of banks are worried about what this means for commercial real estate in Europe as a whole, and whether Signa is a sort of canary in the coal mine. The thing everyone is asking about is the valuations of properties in particular. And Signa was also very aggressive there so that some of its assets, for example, it would buy, it would do not very much to and then it would increase the value of them on its books quite dramatically, sometimes doubling them, in fact. Now, there was a time when it was able to secure borrowing against that. But now, that clearly doesn’t exist. And as Signa sells these assets or as information enters the market about just how overvalued they might be, I think there’s a concern about contagion to other areas of the commercial property market in Europe. And a lot of bankers we’ve been speaking to certainly feel that that contagion risk is quite genuine. 

Marc Filippino
OK. So there’s clearly a concern in the broader commercial property market. What other sectors are exposed to Signa’s collapse? 

Sam Jones
So we know some banks were quite significant lenders to René Benko and to Signa. For example, Julius Baer in Switzerland has over SFr600mn of exposure to the Signa group. There’s a lot of German landesbanken on there — that’s regional banks in Germany. There’s a lot of German insurance companies on there. And there are also quite a lot of individuals who lend money to René Benko. Actually, our listeners might recall the kind of situation in 2007 when it was also many German landesbanken that were the most exposed, or certainly the first to reveal some of the severity of their exposures to subprime real estate. And while no one is comparing the crisis in commercial real estate now to that crisis, there are certainly echoes in the way that this is a market where a lot of lenders are holding stuff, holding paper that is possibly not gonna be worth anywhere near what it’s marked on their books as being. And there’s also a lot of opacity over who holds what. And therefore, a kind of knock-on secondary fear in funding markets, which is where some of the stress is now. 

Marc Filippino
Sam Jones is the FT’s acting Berlin correspondent. Thank you, Sam. 

Sam Jones
Thank you. 

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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