European debt issuance has fallen off a cliff in recent months after an eight-year borrowing binge
Rising interest rates and the end of easy money are causing pain for vast swathes of the economy, but for the European real estate sector the drying up of central bank largesse threatens an entire way of doing business.
“It’s a sector that’s been growing far too much, far too quickly,” said Thomas Samson, a portfolio manager at Muzinich & Co, which oversees $37.3bn. “The problem is the cost of funding is the No 1 driver of profitability. If that goes up, then the music stops.” Real estate investment trusts , which raise money to buy properties or improve existing buildings, previously relied on bank loans in exchange for posting collateral. The ECB’s stimulus gave them access to cheaper and larger sources of unsecured debt, allowing them to expand rapidly. This model is now in danger and investors are worried that the mountain of debt will become harder to refinance — as rates rise — or to repay as rental income declines in a recession.
After an initial flurry of issuance at the start of the year, real estate companies sold just €2.7bn of debt in the second quarter. That’s down almost 90% from the same period the year before, making it the worst quarter of issuance since early 2014, based on data compiled by Bloomberg.
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