Real estate funding model in danger as ECB's easy money era ends

Rising interest rates and the end of easy money are causing pain for vast swathes of the economy, but for the European real estate sector the drying up of central bank largesse threatens an entire way of doing business.

An index of real-estate bonds has lost more than 17% since the start of the year, the worst performing sector in the region's high-rated debt market. The losses stand out even amid a wide selloff in corporate bonds, with an 11% drop in the broader index.

The historic pummeling sent European debt issuance off a cliff in recent months after an eight-year borrowing binge in which real estate companies sold 316 billion euros ($322 billion) of bonds. Investors are concerned that the companies have grown too dependent on cheap funding from the European Central Bank and that the end of quantitative easing could put a lid on a borrowing model that transformed the industry.

"It's a sector that's been growing far too much, far too quickly," said Thomas Samson, a portfolio manager at Muzinich & Co., which oversees $37.3 billion. "The problem is the cost of funding is the number one driver of profitability. If that goes up, then the music stops."

Average yields on euro real estate bonds surged to 4.58% last week from 0.4% last August, according to Bloomberg index data. That compares with about 2% in 2014, when the ECB launched its unprecedented asset purchase program.

The ECB's efforts to help the economy recover from the euro area debt crisis drove down borrowing costs and gave these companies unfettered access to bond markets for the first time. Their borrowing binge since then compares with just 59 billion euros of issuance in the previous eight years, according to data compiled by Bloomberg.

Real estate investment trusts, which raise money to buy properties or improve existing buildings, had previously...