Real estate issuance: for the few
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Real estate issuance: for the few

The opportunistic companies taking advantage now are the exceptions to the rule

Artist Alex Lucas from Bristol with the house she painted in Cheltenham that coincided with the Cheltenham Paint Festival celebrating street art

The seemingly unstoppable rally in investment grade corporate bonds has reached the stage where even real estate borrowers have been tempted to give the market a crack. This is unlikely to be a turning point for the embattled sector, however.

French real estate company Covivio printed a €500m June 2032 deal on Tuesday, the company's first euro outing since 2021, according to Dealogic. The deal drew plenty of demand, with books almost four times covered. It came after weeks of roaring issuance, making this November the busiest in years.

There is some hope among bankers, who are after all paid to get deals done rather than the opposite, that this could mark an opportunistic turning point for battered real estate issuers, which are now a rarity in the markets after being one of the biggest debt issuing sectors in 2021.

But the biggest financial problems in the real estate sector are yet to be felt. A major refinancing wall is approaching when a lot of bonds priced in an era of low rates and loose monetary policy will come due and need replacing at much higher rates..

There is a widespread expectation that the back end of 2024 and early 2025 is when most of the high grade market will come to refinance that cheap debt.

European real estate debt totals €2tr, according to the Bayes Business School. In the last year, only a handful of companies from the sector have come to the euro market, almost all of them with at least one A- rating or above.

At the same time, real estate spreads are already far wider than even those rated well below them. On the same day as Covivio's BBB+ rated deal, Baa3 rated JDE Peet's, a hot beverage company, brought a trade in the same size and two years longer that started 5bp-10bp inside Covivio's initial price thoughts.

Clearly, investors are still demanding plenty of spread protection from the sector, regardless of how the credit ratings agencies see things.

So, while this rally, and any similarly unexpected rallies in 2024, will allow some real estate companies to slip into the market and get some refinancing done, it will only benefit the best rated borrowers and does not even begin to release the pressure building in the sector.

Meanwhile, any downgrades for borrowers to below investment grade could lead swiftly to a looming default or debt restructuring.

You can bet the ranch that tougher times are to come for the real estate bond market.

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