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Ratings agency Fitch produced one of its regular reports earlier this month on the German real estate banking sector, and seemed to have a slightly sharper tone than usual in REFIRE’s view, highlighting several banks’ lack of a retail base in pointing to financing bottlenecks ahead.
Fitch says in its report that specialised German commercial real estate (CRE) banks will continue to benefit from benign market fundamentals in their home market and stronger neighbouring markets, although exposure to Spain and Italy will likely lead to higher loan impairment charges.
"Their lack of stable deposits will make it difficult for some banks, especially independent ones, to meet the net stable funding ratio requirements under Basel III, although the rules are still in flux," says Markus Schmitt, associate director in Fitch's Financial Institutions group, in the report. Some banks, including Munich-based Hypo Real Estate, have now started to take retail deposits, although the level is still very modest.
The drivers of the ‘benign’ real estate climate are identified as a low interest rate environment, low domestic unemployment, increasing private consumption, attractive yields, and inflation fears, which cannot yet be seen, resulting in value-preserving property investments. In addition, low, albeit increasing, construction activity, net migration to metropolitan areas and an increasing number of households are fuelling demand for living space, while foreign investors are showing substantial interest in buying German property.
Furthermore, say the researchers, German CRE lenders have been able to realise increasing gross margins in new business due to less competition and a re-pricing of credit risk in the past few years, although further increases will be difficult to achieve as new and old players are attracted by margins which reflect a multiple of pre-2008 lending conditions.
The study’s conclusion, phrased in the same somewhat soulless language of the rest of the report, is that Germany’s specialised CRE lenders should achieve 2013 profits in line with last year’s. The Fitch view is that “current underwriting standards are sound as loan to value ratios for new business have decreased and have ranged between 55% and 65% in recent quarters, resulting in attractive returns on risk-adjusted capital. In addition, refinancing pressure from high CRE loans outstanding or accelerated liquidation/restructuring of assets from the resolution of German open-ended funds or German CMBS is currently no material threat for domestic property prices.”