Amid growing fears of a possible collapse in German property prices and the resulting increase in loan-to-value ratios, which show signs of refinancing concerns among residential real estate companies, Deutsche Bank believes fears of an impending property crash are overblown.
Definition of relevant technical terms
In this post, it is important to first define the relevant terms. Refinancing concerns refer to the potential difficulties companies may encounter when attempting to take on new debt or refinance existing debt. In an economic environment where interest rates are rising, debt restructuring can cost more and become more complicated as the cost of capital raised rises. Likewise, unfavorable developments in general market conditions, such as a decrease in demand or an increase in uncertainty, may call into question the company’s ability to meet its financial obligations.
The loan-to-value ratio describes the relationship between the amount borrowed and the market value of the property that acts as collateral for said loan. If property prices fall, the loan-to-value ratio of the property increases because the loan now represents a larger percentage of the property’s reduced value. This situation may present an increased risk to the lender, who may require additional collateral or adjust the terms of the loan to compensate for the resulting risk.
A rights issue refers to a method of raising capital in which existing shareholders are given the privilege to purchase new shares, usually at a price lower than the current market price. This approach is typically used in challenging market environments or times of increased financial stress to generate additional capital and strengthen the company’s financial stability.
Deutsche Bank remains confident
According to a Bloomberg article citing analysis by Deutsche Bank, it was emphasized that despite the recent downturn in the real estate market and subsequent increase in loan-to-value ratios, the vast majority of residential real estate companies are unlikely to need additional capital. In this analysis, Deutsche Bank analyst Thomas Rothäusler was positive about the future prospects of real estate stocks, even in the context of the continued decline in property prices.
The basis for this optimistic view is a series of data and forecasts. Thomas Rothäusler relies on information from real estate portal Immoscout, which points to an impending recovery Home prices expansion of the rental market. It also refers to updated rent growth forecasts from real estate company LEG Immobilien, which it interprets as an indicator of “stronger market dynamics.”
However, this stance is in interesting contrast to that of financial services provider Stifel Nicolaus, as Bloomberg further explains. The US financial services provider is said to have said the property industry could face “potentially significant” rights issues in light of falling house prices.
Despite these conflicting views, Deutsche Bank remains confident. He assumes that Home prices in Germany will experience stabilization in the second half of 2023 and predicts that the decline in German residential property values compared to their peaks is unlikely to be more than 20 percent.