German debt study highlights narrowing margins, rising LTVs
A year ago it seemed as if all the tales of emerging new sources of financing for real estate to replace the retreating banks were more wishful thinking than rooted in hard reality – but it’s clear that something more substantial has been underway since then. Germany’s first property financing study – similar to the UK Commercial Property Lending Report produced by De Montfort University – was launched at the recent Expo REAL in Munich, and the study’s conclusions are that there is a very real increase in competition from lenders to finance Germany real estate investments.
The ‘German Debt Project’ was established last year by the IREBS school of the University of Regensburg under the professorships of Tobias Just and Dr. Steffen Sebastian, and kick-started by Real Capital Analytics. Since then sponsors DTZ, Jones Lang LaSalle and market research institute BulwienGesa have weighed in with their support. The goal is to give Germany something akin to the benchmark industry report status enjoyed in the UK since 1997 by the Leicester Business School at De Montfort University (albeit the UK version is published twice a year).
The first German Debt Project analysed €146bn in loans, representing about 50% of the lending market in Germany. First results showed that Germany did indeed experience a sharp decline of €12bn in lending in 2012, despite the fact that the volume of transactions rose strongly.
The report said growing competition for the financing of core assets would lead to declining margins of up to 11 basis points and increasing loan-to-value (LTV) ratios between 2013 and 2014.
“The reason for this development is increasing competition, which is mainly domestic – and from banks rather than insurers,” said IREBS’ Markus Hesse, co-author of the study with Tobias Just. Lenders continue to focus on core so there is no lack of finance in that segment. “This may not be true for B cities or secondary locations, however,” said Hesse. Some 41% of debt assets are currently held in A cities.
Tobias Just said: "Slightly elevated maturities during the years 2013 to 2015 do not lead to major concerns for the interviewed lenders.
"In prime lending (core assets), there are no financing gaps at all. In contrast, there is high competition around lenders. This is not necessarily the case for the debt financing of secondary and tertiary real estate assets."
Respondents to the survey also expressed optimism about a returning CMBS market, with the initial focus on transparent deal and legacy refinancings in the residential sector. Most expressed doubt that there was any imminent wave of non-performing loan sales coming down the turnpike.
There have been several major announcements over the past few months in Germany (which we have covered here in REFIRE) of new financing initiatives for insurers and occupational pension funds, with the Bavarian BVK being the most prominent. At the Expo REAL, there were several fresh announcements of insurers and fund managers turning debt investors. Insurer Allianz said it plans to lend a further €5bn, and Union Investment is also looking to become a provider of debt finance.
Union’s Christoph Schumacher said his group had identified a lot of interest from its investors for moving into the debt funding sector, possibly in the form of partnering up with a bank to provide debt financing at LTVs of 60-75%. Roland Fuchs, the new man in charge of Allianz Real Estate’s European lending programme commented, "Our project pipeline is full, and we have the necessary resources to carry out high-volume property-financing transactions over the next few years."
Fuchs said the investor would act as a direct investment partner to team up with established banking partners to provide club deals rather than directly "replace banks or quickly seize market shares from them".