Real estate has continued to be the most distressed sector in Europe on the back of high interest rates, falling values, elevated energy and construction costs and expensive financing, according to law firm Weil Gotshal & Manges.

Findings from the firm’s European Distress Index showed that real estate was the most distressed sector on the continent for the fourth consecutive quarter in Q4 2023.

The quarterly index, which analyses listed companies, found that rising interest rates also impacted housing affordability, softening the outlook for house prices.

Andrew Wilkinson, senior European restructuring partner and co-head of Weil’s London restructuring practice, said: “As the real estate sector takes the lead in distress within Europe, it’s clear that investment hesitancy and rising costs are symptoms of a larger economic malaise. High leverage poses a significant vulnerability in an unforgiving market, where companies confront rising costs against a backdrop of falling valuations.”

Healthcare was the second most distressed sector in the final quarter of 2023, driven by higher interest rates and increasing debt servicing costs.

Overall, Weil noted that European corporate distress deepened during the quarter amid persistent challenges in profitability and lack of investment.

German corporates continued to experience the highest levels of distress across Europe, followed by the UK.

Although researchers noted a “slight easing” of corporate distress in the UK compared with the previous quarter, it “remains significantly higher” than the same period in the previous year.

Weaker investment metrics, tightened liquidity and reduced profitability are underpinning that distress, according to the report. It added that the UK is also grappling with difficulties of financing large infrastructure projects.

Wilkinson said: “Despite falling inflation, retail and consumer goods companies are still under immense pressure. A challenging Christmas trading period, lack of consumer spending, and issues around pricing reductions have left retailers feeling less than optimistic about the year ahead. With escalating tensions in the Red Sea impacting trade routes, businesses will be monitoring what this will mean for distress levels, particularly with regards to issues around profitability.”

Neil Devaney, partner and co-head of Weil’s London restructuring practice, said: “Corporate distress remains elevated, with profitability at the core of the problem for many companies, as they struggle with increased costs and challenges to supply and production. Though there are some signs of economic improvement, overall distress is at higher levels than this time last year.

“Recent data reveals GDP declining, and the looming possibility of a recession, across a number of developed economies in Europe. Combined with escalating geo-political tensions and over half of the world’s population heading to the polls in 2024, the path ahead for many businesses remains deeply uncertain.”