In the latest sign of stress in the country’s real estate sector, shares in Germany’s largest landlord dropped 6% on Friday after it reported its most significant loss ever for 2023. The residential real estate company reported a loss of 6.76 billion euros for the year, more than double its year-earlier loss of 669 million euros. It marked a stark change in fortune for property firms that had posted years of profit going back to 2010.

Vonovia’s annual loss reflects further writedowns on the value of its rental portfolio and higher maintenance costs. The company’s operating business, which includes project development, apartment sales, and additional services, also fell sharply.

Germany’s property industry is a crucial pillar of its economy, accounting for one in 10 jobs and nearly a fifth of output. The sector is in a sharp downturn, however, as an end to the cheap money era that fuelled a decade-long boom ends and reverberates across the global financial system.

Investors have become increasingly wary of lending to property firms as the market continues to cool. The emergence of a credit crisis in Italy earlier this week has further fuelled those fears and is prompting some lenders to tighten loan conditions for property developers. On Wednesday, the German Banking Association (BDA) warned its members to expect “further weakening” of credit terms.

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Rate-sensitive property stocks have been among the losers on the DAX index in recent weeks. Deutsche Wohnen, the country’s second-biggest landlord, saw its shares slump by more than 20% in three months. Deutsche Bank and Commerzbank have also seen their stock prices plummet due to concerns about a slowdown in the housing market and its impact on mortgage lending.

On Thursday, Vonovia’s CEO, Rolf Buch, told reporters that the company would look to divest around 3 billion euros in commercial properties and care homes to help bridge a near-term financing gap. However, the company will halt residential property disposals until valuations recover.

Buch’s comments come as the company struggles to navigate a deepening downturn in its core residential property market. German house prices have fallen for eight straight quarters and are at a four-year low, with sales activity at a near-decade low.

Vonovia’s operating performance has been hit by a combination of factors, including lower market demand and rising interest rates. The company says it is focused on improving its business model and has started to change how it manages its portfolio significantly. This is in line with the company’s new strategic direction, which was adopted by the management board in November last year. The company has set a target of achieving a net operating profit of 7 billion euros by 2023. This will include cost-reduction measures and a new strategy for growth. The strategy will also focus on strengthening the balance sheet by reducing debt. The company plans to reduce its leverage from 45% of total assets to 40-45% by 2025.