The next couple of years will see an increasing debt gap because of interest rate movements and the rising cost of debt, alongside more restrictive lending policies. This will lead to a shortfall of debt in the market.
“We estimate it at around €31 billion over the next seven years in Germany,” said Tobias Dichtl, co-head of market intelligence and foresight at Colliers.
The debt shortfall will become apparent from 2024 to 2026 and will be concentrated on the office sector, Dichtl said..
“The office sector has a high exposure because of the huge price correction from the high levels seen at the end of 2021,” he said. Investor sentiment is also negative, with discussions about the home office and remote working while WeWork’s insolvency is also troubling for investors.
“The whole picture is cloudy and not enough capital is coming to the office market,” he said.
Colliers expects the debt gap to be a drag on activity at the market level. “You don’t have the equity available for new Investments if you have to push the capital into the gap that develops on the debt side.”
The firm also expects to see problems at the individual property level. “Not all properties will be able to be refinanced over the next couple of years,” Dichtl added.
The focus is currently on the development markets. “That’s the first sector where we see the exposure but it’s also a problem for existing investors in core and core-plus funds. If you have a long horizon you can sit some things out, but if you bought in 2018 or 2019 problems can arise because the values in 2019-2020 were significantly higher than now.”
Problems will arise for funds which do not have available equity to invest into problematic loans, he said.
However, there is already some return to normal for property types such as logistics and residential where price expectations between buyers and sellers have converged. “So we see activity picking up there. But we don’t see that gap closing in sectors such as offices where there’s a huge gap”.
He explained that buyers do not want to buy at current prices, sellers do not want to drop their prices. “We have to see when pricing will materialise and that basically depends on the pressure to sell.”
“We don’t expect a huge pickup next year (2024) but we expect a slow pickup and then 2025 to 2026 will be more normal in terms of activity given that we don’t expect to come back to 2019 and 2020 levels, with the huge transaction volume driven by zero interest rate policy. We expect a somewhat more long-term trend.”