In the second week of March, four large listed residential property groups from Germany will report on their 2023 financial year. In addition to critical operating figures such as rental income and funds from operations, the focus will be on the performance of the portfolio and debt. After years of ultra-low interest rates, the cost of new financing has shot up. At the same time, the risk aversion of potential lenders has increased. The higher the debt ratio, the more difficult it is to access loans. The bond market, a key source of funding for property companies, has been closed to the vast majority of companies since autumn 2022. Only recently have some landlords been able to open the door to the bond market again, including market leader Vonovia.

In the years of low-interest rates, constantly rising portfolio valuations enabled the sector to enjoy an unexpected boom. This is because the vital indicator for lenders is debt in relation to property assets, not the absolute amount of liabilities. The higher valuations, therefore, created more and more room for manoeuvre, which Vonovia, in particular, but also other players, used for numerous acquisitions. Notably, equity also climbed through the retention of book profits. The monopoly game came to an abrupt end with the turnaround in interest rates. What's more, it turned into the opposite. Falling stock values increase the level of debt. As a result, practically all large landlords are trying to sell flats in order to keep their loan-to-value in check and build up a liquidity cushion. In doing so, they want to demonstrate financial freedom of action to the capital market. According to the motto: We are not under pressure.

The Kiel Institute for the World Economy considers the current price reductions to be "historically unprecedented". Never since the expert committees began collecting purchase prices in the 1960s have house prices in Germany fallen so quickly. The discounts for multi-family houses are around 20% over the year. It is, therefore, clear that the significant housing groups will continue to report falling portfolio values as of 31 December 2023. The Swedish landlord Heimstaden, which also owns flats in Germany, has already announced write-downs totalling billions – and lost around 40% of its share price in two days.

At the half-year mark, Vonovia, LEG and TAG had written down their portfolios by roughly 7%, Grand City's figure was slightly lower at 5.4%, and the faltering Adler Group's slightly higher at 8.1%. The question now is how long and how low the portfolio values will fall. After all, the pace of the price decline slowed in the fourth quarter. However, the pressure on valuations continues. Unlike in the past, attractive investment alternatives are available in the bond and money markets. The need for refinancing is also increasing. Property owners are having to refinance favourable loans that they took out five or ten years ago at much higher interest rates. The same applies to investors: European property companies will have to repay or refinance around 120 billion euros in capital market debt between 2024 and 2026; that is 75% more than in the years 2021 to 2023. Those who cannot bear the rising interest costs will have to sell. The supply of property will then grow, while the pool of potential buyers will be tiny.

The transaction market is insanely difficult, the industry keeps saying. According to property service provider and investor CBRE, the 2023 volume was the lowest since 2011. TAG Co-CEO Martin Thiel recently warned his investors that residential property values in Germany could fall by 20% by summer 2024 compared to the high of summer 2022. In his opinion, we even need to make provisions for a 30% fall in values. It doesn't have to be that severe – after all, the housing shortage in major German cities continues to increase, and new construction is collapsing. Both are supporting prices. But it is too early to call a turnaround in residential property prices.