Rising interest rates and the end of easy money are causing pain for vast swathes of the economy, but for the European property sector the drying up of central bank largesse threatens an entire way of doing business.
“It’s a sector that’s been growing far too much, far too quickly,” said Thomas Samson, a portfolio manager at Muzinich & Co. “The problem is the cost of funding is the number one driver of profitability. If that goes up, then the music stops.” Property investment trusts, which raise money to buy properties or improve existing buildings, had previously relied on bank loans in exchange for posting collateral. The ECB’s stimulus gave them access to cheaper and larger sources of unsecured debt, allowing them to expand rapidly.
“The REIT business model has been about the increased level of unsecured financing to get better returns at the company level,” said Tom Ross, a portfolio manager at Janus Henderson. “Do they have access to tighter yields via secured financing? Yes, but that doesn’t really fit their model.”
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