After the interest rate turnaround comes the wave of refinancing
The good news first: long-term capital market interest rates have stabilized, the first interest rate cuts by the central banks have taken place, and
prices on the real estate markets are stabilizing. Following the turnaround in interest rates, the yield gap between real estate investments and German government bonds has now widened significantly again. This means that the market environment for long-term investors has improved considerably over the past twelve months.
Now for the bad news for real estate investors: In the low interest rate era, many have provided themselves with long-term cheap loans, which gradually expire and have to be refinanced. The conditions for such follow-up financing have deteriorated significantly as a result of the interest rate turnaround: In addition to the interest costs, which have in some cases more than tripled since the interest rate turnaround, the values of secured properties have often fallen.
Banks have to comply with stricter regulatory requirements and are less willing to take risks. In many cases, much less debt capital can be granted for follow-up financing.
Property owners are threatened with sensitive financing gaps.
For the entire German institutional real estate market, these gaps add up
to approximately 20 billion euros in the period 2024 to 2028, with the peak being reached in 2026.
Most of the loans where refinancing becomes
problematic concern office and retail properties. In logistics and housing, on the other hand, the deficit is
relatively small.
Strategies for successful follow-up financing
The most important levers for successful follow-up financing lie in the
long-term earnings and value stability of the real estate investment. Property owners should ensure that they maintain or even improve the quality of the location, property, space and tenant quality of a property to be refinanced, as well as its sustainability properties.
Especially in the current phase of the market cycle, the active management of tenants and facilities is therefore becoming increasingly important. On the one hand, it is important to strengthen the income side of the properties. On the other hand, the financial outlay for property management must be kept as low as possible despite increased construction, maintenance and modernisation costs, without reducing the attractiveness of the property.
Due to the changed interest rate and market environment, refinancing requires increased interest sustainability. In most cases, refinancing is likely to have a negative impact on distributions to equity. However, the potential for rent increases in commercial real estate has recently weakened. Declining inflation rates ensure that indexed rents no longer rise as sharply. Investors and tenants are increasingly differentiating between properties depending on their location, sustainability and amenities. This differentiation will also increase the spread in the risk premiums of financiers in refinancing.
Timely preparation is crucial
In any case, investors and asset managers should look into options in good time before the loan expires in order to ensure follow-up financing. Banks and other financiers currently need much more time for credit checks. It is advisable to know about the financing offers of the banks as well as about the conditions of alternative financiers such as credit funds or financing via bonds or bonds.
One man’s sorrow is another man’s joy: If it is not possible to find a financing partner for a loan extension and to close a financing gap with new equity, real estate investors must consider selling their property. The seller’s negotiating position, which tends to be poor, especially in the market environment, creates attractive opportunities for the buyer. In this way, buyers who act countercyclically will find a favourable time window for high-yield opportunities. The use of borrowed capital also has a return-enhancing effect on new investments.
Conclusion: Bottom in sight, targeted investments in demand
Overall, the real estate market is likely to have bottomed out by the end of 2024. Then yield and price levels are likely to stabilize. However, a fundamental, broad market revival is not expected by the end of the year. Instead, the focus for investors will be on attractive, countercyclical investment opportunities from special situations.
