DIFI Index falls back into negative territory
Germany’s property finance index (DIFI), as compiled by JLL and ZEW, fell back into negative territory in the first quarter of 2018, thereby pulling away from the slight gains made in the fourth quarter last year, according to JLL and ZEW’s DIFI report published this month.
The DIFI Index fell to minus 7.9 points, broadly mirroring its performance in the second and third quarters last year. ‘The overall trend is negative, although there was a slight improvement in the fourth quarter,’ Anke Herz, team leader, debt advisory, at JLL Germany, told REFIRE. ‘This trend is driven by a lack of good investment properties and, in turn, limited opportunities for banks to invest. Institutional investors typically don’t want more than 45% equity, so there is really strong competition between lenders, which is driving down their margins.’
Herz acknowledged that she has seen examples of margins coming down by as much as 30 bps in the past six months, although this is not typical.
The fall in the DIFI Index was driven by noticeably more subdued expectations regarding commercial real estate financing in Germany over the next six months: the relevant sub-indicator has fallen to minus 25.6 points due to less optimistic expectations across offices, retail, logistics and residential assets. Nonetheless, sentiment remains fairly upbeat: 76% of all participants reported that their business situation remained good across all segments during the past six months and 17% even reported an improvement, according to the report.
However, lenders’ financing expectations have decreased by 16.2 points overall, according to JLL and ZEW. By asset class, retail fares the worst, with expectations falling by 18.5 points, compared to the perennial favourite, logistics, which has dropped by 14.6 points.
Rising costs for bank bonds
There has also been a marked change regarding lenders’ assessments of refinancing markets compared to the previous quarter, according to JLL. Expectations are more sceptical for the next six months. There is also a degree of caution, likely due to fears that that interest rates will rise in the eurozone.
However, the spreads between mortgage bonds and government bonds are expected to remain stable over the coming six months. By contrast, most experts expect increased spreads in bank bonds, which is likely to make this type of refinancing instrument more expensive for banks compared to mortgage bonds.
And while expectations regarding refinancing tools, including Pfandbriefe, have also declined, one refinancing tool is bucking the trend: mortgage-backed securities, the only refinancing play in positive territory, at +0.4 points.
‘Interest rates are going back up, especially for long-term loans, which is bringing some established insurance companies back into the debt market,’ said Herz. ‘Other insurance players invest in two main ways: either by injecting equity into direct real estate deals or indirectly into bonds, so they are driving the upward trend in mortgage backed securities.’
And in a sign that lenders have to be more flexible in the current climate, LTVS are expected to rise for core assets this year from between 65% and 70% to up to 75%. However, LTVs for value add and opportunistic assets are expected to remain broadly the same, at between 65% and 70%.
Still, the lending market is not expected to get its mojo back just yet, according to Herz. ‘I think the DIFI will probably stay in negative territory this year,’ she warned.