German financing banks boost lending, but cautious on developments

German real estate financing banks boosted their lending on new business in 2021 by 8%, according to new research from broker group JLL, who analysed the business lending of 12 of the biggest commercial property financing banks.

The 12 banks in the study increased their lending last year by 8% over the previous year to €39.7bn. Nearly all the banks increased their loan books overall.

The survey of new lending dealt only with commercial property financing by German banks, for both domestic and foreign loans, and including residential real estate financing for commercial purposes.

According to Timo Wagner, head of debt advisory at JLL Germany, "During the corona pandemic, the banks consistently adhered to their stricter lending policy." This was particularly noticeable in value-add and opportunistic investments in the form of increased capital requirements and higher margins.

"However, in the second half of 2021, banks were increasingly willing to shed their passive stance on the financing market and, in isolated cases, to conclude somewhat riskier new business again," Wagner said.

Stuttgart's LBBW saw the biggest rise in its lending, increasing its book by €1.4bn to €7.2bn. Also making good running was pbb Deutsche Pfandbriefbank which wrote €4.5bn of new business, an increase of €1.1bn. Four banks granted fewer loans than the previous year, foremost among them being Berliner Sparkasse which saw a 37% decline.

In absolute terms, the most active real estate financier in 2021 was DZ Hyp, with new business of €8.2bn (up 8%), followed by LBBW. The Hamburg-based DZ Hyp's book now totals nearly €43bn. The only bank to see its overall lending book actually shrink was Hamburg Commercial Bank, which saw its book fall 14% to nearly €9bn.

Among asset classes, the main focus of the banks remains residential, logistics and office, with hotels and retail properties - apart from grocery-anchored retail - remaining in the dog-house. The banks say there is still plenty of liquidity for project developments, but it's clear that there is big trouble ahead here.

As JLL's Wagner says, "The rise in interest rates is having a noticeable effect, while ballooning construction costs are squeezing developers' profits. In addition, pre-letting in projects under construction or in planning is being valued more cautiously by banks due to the uncertain completion dates. Overall, this makes the financing situation of project developers more difficult."

For the current year, 2022, the 12 banks are still putting on a positive face. Six of the banks said they expect new business in 2022 to be on a par with last year. Four of them expect an increase in the current year, while only two banks are planning for a decrease in new business volume.

"However, it remains to be seen how the consequences of the Ukraine war and the changed interest rate environment will affect the investment market," said Wagner. For foreign ventures, Wagner says, German financing is already grinding to a halt.

Separately, a new study by consulting firm PriceWaterhouseCoopers (PwC) entitled "Construction loan boom despite COVID-19" puts the total volume of new property financing by ALL German lenders at €284bn, up from €273bn in 2020. This is the highest value since tracking began in 2003.

For 2022, the majority of the banks and savings banks (Sparkassen) surveyed do expect even further growth in new real estate lending. But inflation, driven by rising energy prices and global crises are pushing up construction and real estate prices, making the corresponding loans more expensive.

As Tomas Rederer, partner at PwC Germany said, "These developments are leading to more and more clients reaching the limits of their possibilities" and it is all likely to "somewhat weaken" the demand for construction finance this year.

Last year, lenders' loan margins continued to fall due to increased competition for low-risk financing. The net margin after refinancing costs fell on average to 1.04% p.a. in 2021, a decline of about 13% on the previous year. And with increasing risk pressure and possible loan defaults, the banks' caution is bound to increase. "Due to the regulator's interest rate surcharge, alternative investments, for example in the form of securities, are becoming more attractive again," said Rederer.

The main beneficiaries of the lending surge last year were the co-operative banks (Volksbanken and Raiffeisenbanken), who were able to significantly boost their market share. The private lending banks and the savings banks (Sparkassen) saw their market share relatively unchanged. The traditional mortgage lending banks (Hypothekenbanken) benefitted from an 11.5% increase in their lending to project developments, but overall they lost out market share to the other two groups.