Debt gap in refinancing ‘to be expected’ in German market

There will be significant debt shortfalls in the German market in the next few years, delegates heard at Real Asset Media’s Debt Finance and Investment briefing, which took place recently at Ashurst’s offices in Frankfurt.

“We can expect a debt gap in refinancing,” said Tobias Dichtl, co-head of market intelligence and foresight, Colliers.

The shift in interest rate expectations has led to an increasing debt gap just in the last few months. This is capital that was financed years ago that would not get financed today.

“In May the debt gap forecast over the next few years was €28 billion, but now it has gone up to €31 billion,” said Dichtl. “This is driven mainly by higher swap forecasts, further yield increases and the price corrections expected in the next few years.”

That represents a significant drag on market activity. “Dry powder is trending down, and it’s a rapid decline,” said Dichtl. “Lower capital inflows will reduce the amount of equity available for refinancings.”

It is a new reality after the end of the supercycle. Market activity is also low due to the divide in price expectations between sellers and potential buyers. The shift has been rapid as yields have increased across all sectors.

“There has been a lot of movement in a short time frame,” said Dichtl. “Looking at capital values in the commercial investment market, prices are likely to bottom out in 2024. Price corrections are problematic, especially for refinancing transactions done from 2018 onwards.”

Office prices have declined 40% from peak values, according to Colliers figures, while industrial and logistics prices have declined by 20%. However, I&L rental growth has been very strong – 8 to 10% – in the top cities in the last few months.

It is a signal of what is happening across asset classes and across the country: a growing divide between high quality, modern assets in good locations, which are still in demand, and everything else, which is not.

“The increasing polarisation we can see in the market can also be expected on the debt side,” said Dichtl. “Everyone wants ESG-compliant assets. Who is going to finance class B buildings in secondary locations?”

Lenders, like investors, will focus on the top end of the market, especially if it is green, and all other types of properties will find it very hard to find financing.

“Many investors are asking for green loans or transformation loans and we are happy to support them,” said Markus Beran, head of origination, international investors, Berlin Hyp.

“It is easier to get financing if you are ESG-compliant,” said Etienne Naujok, associate director, Edmond de Rothschild. “Liquidity will dry out for brown assets in B locations, but if there’s some reversionary potential, then financing solutions are available.”

Looking ahead, there’s likely to be a shift to managing to green and more value-add strategies to unlock value.

“We will see some pick up in activity in 2025, maybe back up to a €40 billion region,” said Dichtl. “But we are not going back to the €80 billion level again anytime soon.”