Financing sentiment barometer plunges to new all-time low

There has been another steep fall in sentiment among German real estate lenders during the final quarter of the year, with the latest reading of the influential BF.Quartalsbarometer hitting an all-time low, down from last quarter's previous record low point.

In scoring terms, the barometer dropped from -16.91 in Q3 to -18.21 in Q4. What mostly affected the downward plunge in the Sentiment Index was the 89% of survey respondents who reported "tighter financing conditions". This was up from the 82% who said the same thing in Q3.

The BF.Quartalsbarometer is compiled on behalf of BF.direkt AG, the Stuttgart-based specialist for real estate finance, by analytics firm bulwiengesa AG. The now well-established index provides a comprehensive picture of the sentiment and business climate among real estate lenders in Germany, and REFIRE keeps a steady track of its movements.

According to Andreas Schulten of bulwiengesa, “The overall picture that the BF.Quartalsbarometer paints of the current situation on the financing market is bleak. For example, around 70 % of the respondents stated that new lending has kept decreasing or started to decrease lately. Then again, there are some bright spots, too. For instance, the number of respondents who believe that refinancing costs are rising was down to 55% (minus 8 percentage points). For the sake of comparison: In Q2 2022, nearly 80% had reported rising refinancing costs. Moreover, large-scale transactions are still being closed. In fact, more than 20% of the approved loans belong in the bandwidth of 50 to 100 million euros.”

BF.direkt AG's CEO Francesco Fedele said of the latest reading, “In every-day business, we are also confronted with the gloomy sentiment when talking to lenders. Without doubt, it will take a few more quarters before the situation returns back to normal."

It's clear that the rise in interest rates is hurting both real estate investors and lenders. This quarter's questionnaire included the question: “What sort of challenges does the recent rise in lending rates cause for your clients/borrowers?”

The replies of many respondents emphasised the negative leverage effect and the need for higher equity ratios, with several interviewees arguing that the circle of buyers has contracted as a result. One respondent observed that “capital expenditures on portfolio property […] can no longer be financed from a property’s cashflow while still having to cover the loan servicing costs.” Several respondents stressed the fact that the need to “maintain your loan servicing capacity” has become a challenge lately.

Lenders' margins on financing to developers have been surging upwards for several quarters now, and went up another 4 bps in Q4 to 295 bps. This time last year they were 243 bps. Conversely, the loan-to-cost ratio (LTC) has been falling for the past few quarters, with the modest increase to 68.5% (+1.4 pp) in Q4 2022 doing little to change this.

Lending on existing properties is following a similar path, with margins rising and LTV ratios falling over the longer term. Professor Dr. Steffen Sebastian of the IREBS and academic advisor to BF. Quartalsbarometer, said that: “Lenders are also pricing the risk they perceive into the margins. It is higher today than it was a year ago. With that in mind, the rise in margins is plausible and rational.”

As for the direction of prices, Prof. Sebastian said: “An important question in this context is, of course, which way the prices are trending. As far as I can see, there will be no slump in prices. If we had a real estate bubble on our hands, we would have felt it by now. In the longer term, prices will soften in many segments, but they will not collapse. We need to remember that an inflation rate of ten percent already implies a price drop by ten percent in real money terms, assuming that nominal prices remain stable. This in turn dampens the downside potential.”