Low yield, high risk
The German multifamily investment market has already been a casualty of interest rate rises in recent months. This is partly owing to these investments’ low initial yields, which make it difficult for buyers that use high levels of debt, as rising borrowing costs have led to negative leverage. The units traded in 2022 equated to less than a quarter of those sold during 2021, according to Savills. But such metrics, says credit rating agency Moody’s, make for a new kind of vulnerability.

The low yields for multifamily – which are as low as 2.1 percent in Berlin – coupled with higher debt costs mean owners are “particularly sensitive” to default risk, both during the term of a loan and at the point when sponsors need to refinance, says the credit ratings firm. But another part of Moody’s thesis is that tight rental controls are limiting landlords’ ability to offset rising operating and debt servicing costs thereby exacerbating the negative impact of rising interest rates on multifamily property values. For more, read our coverage.

The downside of staying liquid
The European Central Bank explores the financial stability risks of real estate investment funds in Europe in a paper released on 3 April. In it, the ECB argues that vehicles offering frequent redemptions but which own illiquid property assets pose a risk to the stability of the commercial real estate market.

The ECB says the value of assets held by REIFs accounts for 40 percent of commercial real estate ownership in the region, and this exposure is a “key vulnerability” in the event of a deterioration in property market conditions as investor redemptions increase. The paper reasons that when cash buffers are low, as is typically the case for vehicles located in France, the Netherlands and Ireland, fire sales are more likely, adding further downward pressure on property prices. To address this, the ECB calls for: “The consistent application of leverage limits, policies that directly reduce the underlying liquidity mismatch, such as lower redemption frequencies and longer investor notifications…”

Ugly opportunities
As banks become more selective about what they will lend against, it is widely recognised that debt funds will play an important role in refinancing maturing loans. However, debt fund managers active in the US and Europe told affiliate title PERE that refinancing transactions can be challenging in today’s market. Reasons cited included sponsors seeking fresh capital despite having incomplete business plans, and higher debt costs meaning borrowers may not have excess cashflow to put towards loan amortisation.

One debt fund manager, Boots Dunlap, chief executive of US-focused RRA Capital, pointed to the country’s multifamily market in which assets originally financed at low interest rates need to be refinanced in a higher rates environment and at higher cap rates. “My personal opinion is most refinance opportunities are pretty ugly,” he said. Read the full article here.

Data snapshot