Further plunge in German financing sentiment to five-year low

There has been yet a further significant decline in sentiment among German property finance providers according to the BF.Quarterly Barometer. Sentiment has dropped from 0.23 to -0.98 points in the second quarter of 2018, the lowest barometer score in five years.

The BF Quarterly Barometer is published quarterly and is prepared by market researchers BulwienGesa. It is calculated as a composite of various scores, and purports to offer detailed insight into the sentiment and business climate among German property financiers.

The latest reading shows markedly higher pessimism about new business streams in Q2 of this year. Around 22.6% of those surveyed stated that new business has been declining recently (up 14.5 percentage points) – the highest level since the BF.Quarterly Barometer was first introduced. Overall, around 26% are experiencing a decline in new business. In the previous quarter, this figure was around 8%.

BF believes that a further reason for the lower barometer score is the generally increasing refinancing costs for finance providers, with around 86% seeing rising or stagnating refinancing costs.

According to Professor Steffen Sebastian, Chair of Real Estate Finance at the IREBS business school and scientific adviser for the BF.Quarterly Barometer, “Longterm refinancing in particular is becoming more expensive for institutions, as long-term interest rates have been rising for around 18 months already.”

Nonetheless, despite the latest reading the barometer score still indicates a more or less balanced financing market overall, and may be being disproportionately affected by lower volumes. Manuel Köppel, CFO of BF.direkt AG, commented: “The decrease in the BF.Quarterly Barometer is primarily due to the lack of transactions on the market, which also results in fewer financing deals. Market players are still willing to provide finance for high-quality assets.”

Banks are responding to the shortage of properties in different ways, as shown by the respondents’ feedback in the “Current issue” section of the survey.

Some said were observing a "certain willingness to ease risk parameters on the market, reflected in a shift to transactions with higher location risks or rising LTVs, for example". Meanwhile, other institutions are focussing more on core objects in order to assume lower property risks. There were also respondents who stated that many finance providers had not changed their risk policy.

Among asset classes, logistics posted a new record share of 10.7% this quarter in respect of project development financing. “Among niche products, it seems that logistics properties are increasingly perceived as one of the most promising asset classes – not least due to the boom in online retail. In line with this, logistics is also the only type of use for project developments that is currently recording stable margins", said Professor Sebastian.

What effect is this having on margins? There were only small changes in the loan-to-value (LTV) and loan-to-cost (LTC) ratios and the margins in the past quarter, say the latest readings.

While the LTVs for existing properties are falling (down 0.9 percentage points), the LTCs for project developments are stagnating (up 0.1 percentage points). The average LTV and the average LTC therefore remain at a relatively high level of 70.6% and 73.6% respectively. Meanwhile, there was very little movement in the margins, with the average margin for existing properties falling by one basis point to 142 basis points while the average margin for project developments decreased by two basis points to 206.

The worsened sentiment among finance providers is not affecting alternative financing instruments. The institutions surveyed are observing stronger demand for alternative forms of finance (46%, up 9.8 percentage points). These include mezzanine capital and equity (e.g. in the form of private equity or joint ventures), which are the most frequently used alternative forms of finance at 31.7% each.