German property slump to widen office quality gap: Moody’s

GERMANY’S real estate woes have led to a slump in construction, which will deepen the divide in credit quality between the owners of prime office buildings and those with older, less attractive stock, said Moody’s Investors Service on Wednesday (Feb 28).

It expects high raw material and financing costs will weigh on building activity at least through this year, squeezing the supply of new office space. 

While this means more headwinds for developers and building materials firms, landlords of high-quality commercial properties will likely benefit from the shortage.

On the other side, secondary stock will “underperform in terms of occupancy and rental growth”, as weaker economic activity and tighter environmental, social, and corporate governance rules undermine tenant demand, Moody’s said in a report.

A series of interest-rate hikes have helped to plunge Germany’s property sector into crisis, with much of the focus on commercial real estate and the lenders with exposure to the industry.

Values are estimated to have fallen sharply, though a lack of transactions means the true state of the market is unclear.

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Meanwhile, sentiment among German homebuilders dropped to a record low last month, due to a lack of new orders and ongoing project cancellations. 

The European Central Bank has now paused interest-rate increases and is expected to cut borrowing costs later this year.

But Moody’s said that a recovery in building activity in 2025 “remains highly uncertain”.