Real estate companies with near-term bond debt maturities face the prospect of having to sell assets at prices below current valuations to meet repayment obligations, according to a note by Scope Ratings. The rating agency said this would prompt a “severe adjustment” in Europe’s property prices.
Berlin-based Scope said that for most issuers to meet creditors’ expectations of de-risking balance sheets, asset sales would be “essential”. Wide spreads in the capital markets and limited bank lending would make it difficult to replace existing debt capital with new lending for all but low-leveraged companies with high-quality assets.
Given the limited possibilities for refinancing debt, Scope explained, firms would have to accept “steep discounts” on property sales to enable buy-side financing or undertake larger revaluations to restructure their balance sheets.
Asset sales, Scope predicted, would cause a “potentially vicious circle” whereby properties are sold below book values, causing a sharp drop in values on other assets. “Squaring the refinancing-investment circle may require a severe adjustment in property prices – unless extra state support emerges,” Scope added.
It also predicted a “massive repricing” of properties which did not comply with the latest environmental standards.
Last week, evidence emerged investors are walking away from buying properties, or paying lower prices than expected, due to concerns about transition risk – a term which describes the risks, in terms of cost or feasibility, associated with reducing a building’s carbon emissions.
Scope also pointed to an increasing number of defaults among real estate companies, particularly among homebuilders and commercial developers, citing several in Germany –Development Partner, Project Immobilien Group, Gerch Development and Euroboden – as examples.
“The substantial funding needed not only to bridge the time to disposal but also to secure financing of working capital outflows given high construction costs, is difficult to access,” Scope explained.
Maturing bond debt
The aggregate amount of bond maturities is mounting – growing from €28 billion in 2023 to €45 billion in 2026.
It is possible for real estate companies to access bond debt today, Scope said. But spreads remain high and this source of finance is “much more expensive” than it was 18 months ago, Philipp Wass, analyst at Scope, who authored the report, said.
“In the context of still rising interest rates, most issuers are focussed on deleveraging through asset sales to pay down debt maturing this year and next, and sometimes in 2025 and later,” he explained.
While some companies are replacing bond debt with secured bank lending, Wass said the “high level of uncertainty” meant banks are “much more selective” in providing commercial loans in a sector where the risk is growing that those loans turn sour. “Lending is therefore slow and concentrated among solid clients or those willing to restructure their balance sheets,” he added.
Scope said there were more examples of banks offering loan-to-values of over 50 percent and lowering interest coverage ratios compared with 18 months ago, but added they would not increase their lending to the real estate sector indefinitely, forcing borrowers to seek other forms of financing. It added alternative lenders are also financing high-quality assets.
“Given limited options, borrowers will be forced to secure highly priced capital market debt, mezzanine loans or ultimately issue equity to confront the maturity wall,” Wass wrote.