Real estate EUR corporate bond market: Will the recovery come in 2024?

The market for EUR real estate corporate bonds has grown strongly in recent years. This has enabled real estate companies to extend their financial liabilities and diversify their financing portfolios. After peaking in 2021, the primary market has been overshadowed over the last two years by the war in Ukraine and the ECB's restrictive monetary policy. In our opinion, access to the capital market is likely to remain tight for real estate companies in 2024. This is because the attractiveness of the real estate sector is currently suffering from the economic slowdown as a result of global economic and political uncertainties and the still high level of interest rates.

The EU's sustainability efforts are shaping the real estate issuance market. The proportion of ESG placements has risen steadily since 2011, reaching around 40% of the total volume by 2024 (YTD), and the momentum remains upward. Green bonds are the most common form within the ESG categories.

Conditions on the real estate market have changed radically since 2022. The ECB's drastic and rapid increase in interest rates led to higher borrowing costs, while the sharp decline in transactions resulted in devaluations of real estate portfolios. The expected easing of the ECB's monetary policy should provide positive stimulus for the debt-intensive real estate economy. We expect the first interest rate cuts in June. Nevertheless, we consider the current low spreads to be excessive and expect slight upward pressure this year.

However, if sentiment continues to brighten, the investment grade real estate sector offers potential compared to the non-financial sectors. However, it remains to be seen whether 2024 will see the start of a recovery in the real estate sector. Many challenges still remain.

According to Moody's, the still relatively high (re)financing costs will pose the greatest risk to the credit quality of real estate issuers over the next 12-18 months, as the high interest rate level is not yet fully reflected in real estate valuations. Issuers' interest coverage ratios will remain under pressure and debt levels are likely to rise. However, the still relatively low refinancing requirements of real estate issuers in 2024 remain supportive.

Real estate corporate bond market

The EUR issue volume in the real estate sector, which is part of the financial segment, has risen significantly in recent years. While bonds worth just EUR 10bn were placed in 2012, the issue volume reached EUR 84bn in 2021. The low interest rate phase (2014-2021) undoubtedly contributed to this, which companies used to strengthen their liquidity and extend the maturity profiles of their financial liabilities. Issuance activity was overshadowed by the war in Ukraine and the restrictive monetary policy over the last two years, meaning that it was significantly below the long-term average in 2022 and especially in 2023.

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