Is there a credit crunch in German real estate financing?

It is notoriously difficult to get a clear answer to the question of whether there is a ‘credit crunch’ or not in the financing of German real estate.  The answer nearly always depends on the borrower, the asset to be financed, the bank who’s answering the question, or any number of other factors. Access to funding is seen as such a competitive advantage that those who have it, naturally flaunt it. Those who don’t, are - naturally - dealing with other priorities.

There were a number of interesting perspectives presented at a recent seminar in Frankfurt, organised by IPD Deutschland, on the theme of “Real Estate Investment and Financing”.

According to Stefan Mitropoulos, the head of economic research at the Frankfurt-based Helaba Landesbank Hessen-Thüringen, there is an abundance of capital available for investment in real estate, particularly equity capital.  However, it's all too focused on very few segments, he argued.

While not admitting to an actual “credit crunch” in Germany, debt capital is a different matter, he conceded.  Banks are still extremely cautious in issuing new loans, and haven't yet started to loosen their credit standards since the onset of the financial crisis.  Nonetheless, in his view, borrowers with a good track record ARE getting loans, as are those with lesser blue-chip credentials, but who are happy to pay an appropriate risk premium. (Hmmm…)

Also speaking at the event was Maria-Teresa Dreo, the head of German commercial property lending at Unicredit in Germany.  Her bank, she said, will have written €3 billion in new business this year by year-end, or up to €4.5 billion including prolongations.  Her comfort zone is loan amounts of between €25 million and €100 million, pointing to the fact that for between €10 million and €30 million loans, her bank is completely uncompetitive when compared to the local Sparkassen.

When it comes to refinancing large-sized portfolios, Ms. Dreo said she prefers to do this in small bites.  “This is particularly true for residential deals.  Because when it comes to club deals, every participating bank has to go over the entire portfolio of thousands of individual residential units with a fine-comb.  All this makes club deals very labour-intensive, and so are now viewed unfavourably by the banks.”

Ms. Dreo reserved particular scepticism for bond issuing as a form of refinancing.  “There is little room for these kinds of bonds any more, since the issuing real estate companies tend to be very heavily indebted.  The lack of adequate rating mechanisms and their relative unfamiliarity on the capital markets also make them unsuitable”, she said, referring particularly to the mid-sized bonds currently traded with limited regulation on Germany's stock markets.  (Her scepticism was well justified, it turned out barely 10 days later, with the insolvency of the leader in the bond issuing segment Düsseldorf’s WGF AG, filing for insolvency due to its inability to repay its bonds – see elsewhere in this issue).

Ms. Dreo also shared insights gleaned from discussions with many insurance companies, who have taken limited steps to fill the funding gap opened up by the withdrawal of the traditional lending banks.  Insurance companies such as Allianz are lending upwards of €50 million on a deal, so far only on core commercial properties, and at a maximum loan-to-value of 60%.  “These insurers are only making large loans because they want to avoid building up large loan departments, given the uncertainty as to how long the current situation will prevail.  If interest rates rise in a year or two and new alternative investment possibilities emerge, then the insurance companies are likely to drop this financing business fairly quickly” she cautioned.

Debt funds are likely to prove themselves a sustainable source of new financing, since they also provide subordinate loans with up to 80% loan-to-value.  “We at Unicredit would then be happy to take the senior tranche with 50% or 60% loan-to-value”, she said.

Markus Kreuter, credit risk manager at Deutsche Bank, highlighted how the securitisation market has so far failed to reignite, with only three deals taking place since the jamming of the markets, in all of which is bank was involved.  Two of these were in the UK, and one in Germany.  Residential property investor Vitus had successfully securitised a €754 million loan in September of this year, the first time since the onset of the crisis that any CMBS transaction had benefited from the injection of fresh capital.  The issue was well oversubscribed, Kreuter reminded his audience. He suggested, as did Ms. Dreo of Unicredit, that several more such transactions were in the imminent pipeline.

Not surprisingly, both Kreuter and Ms. Dreo sang the praises of the trusty German Pfandbrief, which still offer the lowest spreads compared to any other internationally-traded covered bonds.  The roots of its strength still lie in the maximum of 60% loan-to-value that the bonds cover, said Ms. Dreo. And refinancing via Pfandbriefe is still 160 basis points cheaper than issuing bank bonds, she reminded her audience.