Xinhua Finance Frankfurt, May 11 (Reporter Shao Li) Under the continuous high interest rates, although the number of bankruptcies and bankruptcies of German real estate companies has increased significantly, there is no major market risk, especially the business model of large and medium-sized real estate listed companies and real estate investment funds that attach great importance to liquidity management has shown considerable resilience in the predicament.
The eurozone's interest rate hike cycle has been going on for almost two years, and the key interest rate has been at a record high for seven months, and German real estate companies have come under tremendous pressure, but have so far weathered the significant decline in house prices over the past two years.
Despite the sharp depreciation of asset prices, heavy debt burdens and surging financing costs, Germany's major listed real estate companies have shown strong resilience in the face of the crisis. For example, Vonovia, Germany's largest housing group and a member of the Dax index, has now rebounded more than 80% from its all-time low on March 28 last year to about half of its all-time high at the end of August 2020.
Caption: Germany's largest listed residential stock has begun to rebound significantly in the face of high interest rates
There are four main factors driving the recovery in German property stocks:
First, investors strongly expect the ECB to cut interest rates soon. European Central Bank (ECB) Chief Economist Philip Lane said this week that the case for the ECB to cut interest rates in June is getting stronger. In addition, a number of Council members expect three rate cuts in the eurozone this year.
According to the Federal Statistical Office, residential prices in Germany fell by 8.4% in 2023, the largest drop since 2000. The main reason is that interest rates have risen sharply, resulting in more expensive loans and a sharp drop in real estate transactions.
According to Cushman & Wakefield, the value of real estate transactions in Germany's seven largest cities fell by 65% year-on-year in the first half of 2023 alone. Some bankers don't think the market will recover until 2025.
According to Commerzbank, second-hand home prices could stabilize around the end of the year if long-term interest rates in the market (not only by the ECB's key interest rate adjustment, but also by changes in US Treasury yields) do not rise further significantly.
Photo caption: A soon-to-be-delivered development in Frankfurt
Second, the restructuring measures of large-scale asset sales of listed real estate companies to German state-owned enterprises have greatly reduced liquidity risks. On May 1 of this year, for example, Vonovia announced that it had sold 4,500 apartments at book value to two Berlin municipal housing companies. This alleviates many investors' concerns about real estate businesses selling their holdings at a deep discount.
Most analysts believe that its share price will rise further thanks to further restructuring measures. The company plans to sell residential properties worth up to €3 billion this year to increase liquidity. Last year, around 4 billion euros flowed into Vonovia in this way.
Third, rents continued to rise, making up for some of the losses of real estate companies.
Vonovia has around 546,000 apartments in Europe, most of which are located in Germany. The rental market is booming due to a significant reduction in residential construction projects and an increase in immigration. Last year, the group's rents rose by an average of 3.8 per cent, and LEG Immobilien, another mid-sized real estate market-listed company and a component of the Mdax index, also saw an increase in average rental income of 4 per cent. Experts expect rents in Germany to continue to rise significantly in 2024.
Fourth, Germany's listed real estate companies still insist on paying dividends despite large losses, which attracts investors.
Vonovia had to write down the value of its homes by 11 billion euros in 2023, with a net loss of 6.75 billion euros, about 10 times the previous year's loss, given the fall in real estate market prices. LEG Immobilien also lost around 1.5 billion euros last year.
Despite this, the two companies announced dividends to shareholders. LEG, in particular, grew by more than 66% in its key profit measure of available cash flow (adjusted working capital) despite the large losses. As a result, a dividend of €2.45 per share was declared for distribution to shareholders after no dividend payout in the previous year. The decision was warmly welcomed by investors, with the results rising by more than 4% on the day of the announcement.
At present, not only are the business models of listed real estate companies in Germany focusing on liquidity security, but large open-ended real estate funds are also adopting liquidity standards well above the statutory requirements to cope with the emerging challenges of net outflows.
Over the past 17 years, investors have consistently invested more new money in open-end real estate funds than they have lost from them, according to a research report from Scope, a European rating agency. However, due to the impact of high interest rates and falling property prices, it is expected that real estate funds will see a significant net outflow of funds in 2024. In the first two months of this year alone, this amount has reached 500 million euros. Since the start of the net outflow last year, the cumulative scale has exceeded 1 billion euros.
Scope analysts Sonia Knoll and Khosner Hubani said the peak of net outflows from large amounts of money from real estate funds this year is expected to occur in the third quarter.
While experts have not ruled out the possibility of a future suspension of redemptions in individual funds, they believe that most funds will not experience a serious liquidity crisis. This is mainly due to the policy adjustments after the 2008 financial crisis, such as the law that stipulates that anyone who buys a fund cannot redeem it immediately after a holding period of at least two years; Funds purchased after 21 July 2013 will require a 12-month notice period to get their investment back if there is a centralized redemption request. This gives fund managers a year to raise capital through the sale of the property.
In addition, after 2008, Europe also imposed stricter requirements on the liquidity of real estate funds, that is, they must be 5% of the fund's assets. At present, the cash flow ratio of real estate investment funds is more than 15% on average (the cash holdings of all real estate funds are still more than 17 billion euros), which is well above the legal standard.
Editor: Wang Chunxia
Statement: Xinhua Finance is a national financial information platform undertaken by Xinhua News Agency. In any case, the information published on this platform does not constitute investment advice. If you have any questions, please contact customer service: 400-6123115