Scope Ratings says only solidly investment-grade companies rated BBB and above have access to the most liquid debt capital markets.

“Falling bond yields and tighter spreads can provide capital market-based financing which is competitive with secured bank borrowing. For these issuers, spreads for new issues ranging from 90bp to 150bp, close to the 25bp-145bp range in 2021, the year when capital market debt issuance for real estate companies peaked,” says Philipp Wass, Managing Director, Corporates Credit Production.

For borderline investment-grade companies rated BBB-, investors’ fears of rating downgrades are visible in much wider spreads. Spreads on new issues running above 200bp, a sharp contrast with the 60bp-145bp range in 2021.

“While we believe prices have reached bottom for some property classes, investor jitters also point to the risk of further drops in property values at the riskier end of the European commercial property market,” Wass says.

Banks’ appetite to fund weaker commercial real estate remains muted which exposes real estate managers to a doom loop. Distressed asset sales may challenge current valuations and can become a catalyst for balance-sheet restructuring.

“In addition, potential sales by open-ended real estate funds to offset cash outflows will test the market’s resilience,” says Wass.

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