By John O’Donnell and Tom Sims
FRANKFURT/BERLIN (Reuters) – Berlin’s borrow-to-spend splurge is driving up borrowing costs, further choking embattled property companies seeking fresh loans and threatening to compound the country’s wider economic woes.
A property crisis in Germany, Europe’s industrial engine, has seen worried investors pull billions of euros out of the critical sector, amid scores of company bankruptcies.
After rocketing over the past decade, property prices are now in a downward spiral, with experts predicting there will be worse ahead.
Tumbling demand for offices, many still vacant after the pandemic, and a continued slide in home values are compounding Germany’s problems, as it grapples with one of its biggest post-war economic slumps.
Earlier this week, the country’s lawmakers agreed to go on a 500 billion euro ($545.45 billion) borrowing spree, ditching self-imposed debt restraint, to renew the country’s sagging infrastructure.
Perversely for German companies, intended to benefit from this boost, it means higher borrowing costs.
The yields for benchmark 10-year government bonds, which determine the cost of credit, rose more than a quarter percentage point after the recent spending plans.
“The clouds have darkened,” said Sven Carstensen, a manager at Berlin-based consultancy Bulwiengesa, warning that the recent rise in borrowing costs put a question mark over the belief that home prices were over the worst.
He said deals for commercial property, such as offices, were already “very muted because prices are too high” and would likely remain so this year.
On Wednesday, the chief executive of Germany’s biggest property owner, Vonovia, also sounded a cautious note.
Announcing its third year of losses, taking the tally to more than 8 billion euros, Rolf Buch cautioned that his plans to return to growth may be upended by the Berlin spending, meaning it may have to postpone some building projects.
“Higher interest rates are not good for real estate values because they make refinancing more expensive,” Buch told journalists.
Furthermore, it is unclear whether any of the money will trickle down to the property sector given more pressing demands, such as the ailing rail network. Germany’s fragmented system of government, riven by rivalry and where local politicians hold much sway, could also delay money reaching property firms.
Florian Schwalm, a managing partner at EY for real estate, said that however the spending plans are sliced and diced, the impact on revitalizing real estate will be muted.
Against this backdrop, a continued trickle of bad news is casting a shadow over Germany.
In January, investors withdrew 500 million euros from German property funds, continuing the worst spate of outflows since the global financial crisis and following turbulent months, where roughly 7 billion euros was taken out by investors, according to an analysis by Barkow Consulting.
“The stream of bad news last year means that there is no end in sight,” said Peter Barkow. “We’ll see another rush to withdraw from such funds in the middle of this year.”
The German economy is meanwhile struggling.
One in five of the 202 insolvencies of big German companies last year are property firms, according to an analysis by consultancy Falkensteg.
Germany’s 730 billion euro property industry is a critical pillar of its economy, representing nearly a fifth of output and eclipsing the country’s famous car sector, according to the ZIA industry association.
After years of boom, real estate ground to a halt in 2022 when the European Central Bank swiftly hiked interest rates to stamp out the worst bout of inflation in decades.
The industry, which had been firing on all cylinders, was ill-prepared. Construction projects halted, workers lost their jobs, building sales collapsed and property developers went insolvent.
The most spectacular collapse was the property and retail giant Signa, with its big footprint in Germany.
It resulted in the sale of Germany’s most famous department store, KaDeWe in Berlin, and the halt in the construction of a skyscraper in Hamburg.
“The higher cost of borrowing is here to stay,” said Andreas Naujoks, a real estate lawyer with Noerr. “While big companies may get through, smaller companies will struggle.”
($1 = 0.9167 euros)
(Reporting By John O’Donnell; Editing by Alexandra Hudson)
