Financing index DIFI rises, margins tightening

Sentiment on the German market for commercial real estate financing, as reflected by the quarterly DIFI index, improved again in the second quarter, as Germany’s currently favourable economic climate led to a further rise in optimism in the period.

The DIFI (Deutsche Immobilienfinanzierungsindex) is an index managed through quarterly readings by property advisor JLL and the ZEW Zentrum für Europäische Wirtschaftsförderung in Mannheim, covering the financing climate in different real estate categories. For the second quarter it rose to 24.9 points, a gain of 1.9 points on the first quarter. Across all asset categories the composite component of the index rose to 39.3 points, a rise of 5.1 points year-on-year.

The latest index reading shows that increasing competition among finance providers for core assets is leading to a noticeable tightening of margins, while most respondents expect margins across all asset categories to shrink further. Typical margins for ‘core’ financing of office, retail and logistics properties at the moment are put at 100-150 bps, while margins on residential property are estimated at 50-100 bps. The equivalent figure across all categories of ‘value-add’ is 150-200 bps.

Typical market LTVs for ‘core’ asset financing in the office and retail segments were seen as 60-65% in June 2013, and are now 65-70%