Real Estate

TAG/German residential: valuations pile pressure on oversized balance sheets

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Germany avoided the mishaps of its peers during the previous European housing bubble over a decade ago. It has more than made up for it this time around. Following a boom, higher interest rates have triggered a bust. An update from apartment owner TAG Immobilien on Tuesday offered a lens into the travails of landlords and their shareholders. 

Deleveraging is the order of the day. Landlords must tighten their belts with lower outgoings and sell properties to pay down debts as valuations fall. TAG said it would not pay any dividends for the second consecutive time this year and would continue to sell apartments.

The all-important loan-to-value ratio remained steady in the third quarter at 47 per cent. But lagging declines in valuations will continue to work their way into the reported numbers. TAG and its peers remain at risk from the exuberance of the low rates era. 

Line chart showing share prices (rebased) of TAG Immobilien, Vonovia and LEG Immobilien for 2016-2023

Like Vonovia and LEG Immobilien, TAG has expanded through acquisition. It bought Polish developer ROBYG at the end of 2021 and was forced to raise equity last year. That diversification, however, provides an edge. Polish house prices are still rising and demand is strong. 

Cracks in the German housing market loom large. Prices are now falling rapidly, down 10 per cent year on year in the second quarter. That is putting pressure on balance sheets as refinancing windows approach and lenders demand tighter standards. 

The risk of breaching debt covenants remains the biggest threat to shareholders. TAG appears safer than some. Based on analysts’ estimates of current valuations, Vonovia and LEG are likely to be much closer to the limit.

Two charts. First, a line chart shows European house prices, indices rebased for Germany, Spain, EU, Italy and France, 2018-2023. Second chart shows European residential balance sheets, Loan-to-value ratio (%). Categories are reported, FY24E at Green Street spot values, Covenant and Debt/EV. Companies shown are Balder, LEG, Vonovia, Kojamo, TAG, Grainger, Grand City and Unite.

Yet TAG does not have a lot of wriggle room, given covenants stipulating loans should be under 60 per cent of asset values. They are now about 55 per cent, based on estimates of current values by Andres Toome of Green Street.

There are signs that interest rate rises may be levelling off. That holds out the promise of respite. But, for now, the market is weighed down by the high leverage of some of the largest property companies. Given the potential for forced selling, it is too early to expect a let-up in downward pressure.


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