Climate cools for German commercial property financing in Q1

Despite what came as a surprising last-quarter surge in commercial property transactions in Germany last year, the climate for German commercial property financing continues to cool as the industry faces into 2013, according to the FAP-Barometer, managed by Flatow Advisory Partners.

The quarterly FAP-Barometer index was introduced last year by the Berlin-based Flatow Advisory, which focuses on identifying and providing alternative sources of finance to commercial property investors. The quarterly survey, carried out in conjunction with research house BulwienGesa, is based on feedback from 240 market participants directly responsible for issuing property loans. Readings are measured on a scale of -15 (credit crunch) to +15 (plenty of liquidity).

After falling in the last quarter, the barometer reading in Q1 is -0.25, down from +0.5 last quarter, indicating a cooling in the availability of finance for commercial projects. Curth Flatow, founder and CEO of FAP, commented: “The negative trend is only marginal, but it is significant that the psychologically important zero barrier has been broken through. That's a signal for tightening conditions on the commercial property finance market.”

Although nearly 80% of respondents described financial conditions they were facing as similar to the last quarter, 13.8% admitted to tightening their conditions, while 6.9% believed they were operating a slightly looser policy. However, the deterioration in the index may more likely have to do with market dynamics, with less banks reporting increased new business figures, and a decrease in loan size. Zero respondents now believe that credit institutes will finance tranches of more than €100 million, down from (an admittedly small) 2% in the last reading.

Respondents provided some insight into their new priorities when asked to list the key concerns in attracting new business, with answers which indicated a willingness to take slightly more risk – or at least a downgrading of ‘minimising risk’ as a key criteria. Flatow commented, “This could indicate a tentative willingness to take on slightly more risk. If this trend levels out, we could even conclude that the time for focusing on absolute safety in the real estate economy may even be behind us.”

While the focus of investors is still clearly on safe ‘core’ assets, some fluidity is creeping into the picture. For example, now topping the list of favoured asset classes of financing institutes are office properties, followed by shopping centres. Residential has now been relegated to third place on investors’ priority lists, from its previous position at the top.

It's also not surprising that margins have risen slightly to reflect the allocation of more limited resources to the best projects. Most panel respondents, however, do not believe that margins are likely to rise much further.

With loan-to-values on existing properties ranging between 50% and 90%, the average across all asset classes is 69%. Margins range from 95 basis points to (for the first time) more than 600 basis points. Most borrowers are paying from110 bps up to the median of 200 bps. Project developers are paying margins of 100 bps to, again, over 600 bps, with the median being about 250 bps, again reflecting higher perceived risks for development..

Only a third of respondents said they saw higher demand for alternative sources of financing. Flatow commented, “We think the reason for this is that providers of alternative finance - insurance companies, pension funds etc - are setting pretty much the same conditions as the traditional providers, so that the market perceives that the new sources are merely adding to the list of existing providers rather than providing complimentary funding, or filling an unmatched gap.”