A key topic at gatherings of real estate players all around Germany these days is the question of alternative financing for real estate investment, i.e. who or what will replace the traditional source of funding, as the banks withdraw from property lending.
Since its launch last year, we regularly update our readers on the latest FAP-Barometer reading initiated by the Berlin-based Flatow Advisory Partners, which gauges the climate for commercial property financing in Germany based on feedback from market participants. While the barometer showed a negative reading of minus 0.25 for the first quarter – a notable deterioration from the plus 0.5 on the scale in the previous quar ter – this is more likely to be a reflection of the shift within the commercial financing industry rather than a harbinger of im- pending financial doom.
At least, that was the prevailing opinion at a seminar in Düsseldorf’s Wirtschaftsklub last week (attended by REFIRE) which brought a full gathering of luminaries together to discuss the subject of “The Financial Markets Upheaval – Who Will Replace the Banks?”
Marcus Lemli, the head of Savills in Germany, told the audience that “The gap in financing for commercial property, that’s come about from the withdrawal of the banks, is being shrunk by the arrival of new players – but is also being reduced by investors stumping up more equity. In the long run, real estate financing will become a significant part of their business for insurance companies, while debt funds – after a consolidation phase – will also become a key long-term alternative source of financing for commercial property.”
Dr. Patrick Brock, partner at law firm Taylor Wessing took a very different view. He anticipates rising interest rates, where the effects of Basel III will be even more pronounced for traditional lenders, and will exert even more pressure on debt funds and mezzanine lenders. Direct ‘capital-market-driven’ financ ing in the form of securities is likely to become much more prevalent, particularly for refinancing rather than fresh financing, he believes. Given the hunger from the capital markets for investment vehicles with adequate safety margins/ LTVs and tangent underpinnings such as bricks-and-mortar, we will see the rise of more tradable instruments similar to Pfandbriefe, with investors calling on the services of rating agencies to grade the quality of the securities on offer, he said.
Axel Brinkmann, director for debt investments in the London office of LaSalle Investment Management, put it colourfully: “The smorgasbord of financing possibilities for borrowers in Europe is undergoing sustainable change – in the UK, alternative sources of property finance have already firmly established themselves. In the last 18 months LaSalle Investment Management itself has invested more than €290 million in senior and subordinated debt finance.”
Curth Flatow, founder and chief executive of Flatow Advisory Partners, commented, “Financing conditions on the market are very similar, whether from a bank or a debt fund, so new arrivals on the marketplace are being overwhelmingly viewed as just a further complementary source of funds helping to close the financing gap”.
Insurance companies are being seen as having a long-term role to play, while this is seen as less true of the debt funds and the occupational pension funds, he suggested, a point which was also emphasised by Andreas Schulten, board member at market research firm BulwienGesa. “A lot of people are viewing the approach of the pension funds and the debt funds as something of a ‘flash in the pan’ given current circumstances – while crediting the insurance companies with a somewhat longer view.”
