German financiers becoming increasingly pessimistic; long term trend ‘highly negative’

German financiers are becoming increasingly pessimistic, with sentiment among them hitting an all time low this quarter, according to BF.direkt.

The BF. Quarterly Barometer fell from -1.3 points in the third quarter to -4.41 in the fourth quarter, a drop of 3.11 points, marking a new low since its launch in 2012. BF.direkt attributes the drop to a greater share of respondents – around 21% - anticipating more restrictive market development. At the same time, far fewer banks – just 17.6% - believe that the market is improving. In addition, 26% of banks say that liquidity costs and refinancing premiums are rising, which is contributing to the ‘highly negative’ long term Quarterly Barometer trend, according to BF.direkt.

‘It is not easy to account for financiers’ pessimism,’ said professor Steffen Sebastian, chair of real estate finance at IREBS and academic adviser to the BF.Quarterly Barometer. ‘The most likely cause is the modest economic outlook. The new record low reflects respondents’ uncertainty as well as a further weakening of the global economy caused by trade conflicts and Brexit.’

Nonetheless, financing volumes in commercial real estate remain stable, according to Sebastian: ‘There are no signs of a slump in that regard, at least not in terms of anticipated lending. However, increasing or stable lending volumes alone do not mean that business is going well. As margins are still being squeezed by ongoing intense competition while risks are on the rise, the relationship between profit and risk is becoming more and more unhealthy.’Margin development in the fourth quarter shows no indication of deteriorating conditions. Margins on existing stock have increased to 127 basis points (+8 bps) while project development margins have fallen slightly to 201 basis points (-2 bps). At 69.6% (+1.3%), average LTVs have risen again for the first time since the first quarter of 2019. 

‘The pessimism is more about sentiment than the fundamentals, which are still ok, and in line with previous quarters,’ Manuel Köppel, CFO of BF.direkt, told REFIRE. ‘Lenders may have a fear of a slowdown in the market or of a possible recession. LTVs have gone up slightly this quarter but it’s more of a sideways movement. It’s not dramatic.’

Going into next year, we might see a more difficult lending environment, ‘although not especially in the real estate sector’, according to Köppel: ‘We’re based in Stuttgart and we see that the automotive sector is under pressure,’ he said. ‘We see this in the south west in general and banks are seeing it in their overall loan books. There has been an increase in insolvencies in Germany and this will be felt by corporate lenders, so the pressure on them will increase. Increasing uncertainty is not good for the market but compared to other sectors, such as the automotive one, the relative attractiveness of real estate will increase because it’s more stable. It’s too early to say what direction our barometer will go in next year. It depends on what happens politically between now and then because short-term and populist movements such as the rent cap discussion might have an impact. However, the recent Grundsteuer (land tax) legislation – as with any factor bringing more legal certainty - should be positive for the market.’

vdp property price index hits all-time high 

Not all indices are signalling doom and gloom this month. One index that is surging ahead is the vdp property price index, with prices up almost 6% y-o-y, to a new all time high of 159.7 points (base year 2010 = 100). ‘The prices in the German property market are still going in only one direction: upwards,’ said Jens Tolckmitt, CEO of the vdp. ‘Both residential and commercial properties remain very much in demand. As expected, however, the third quarter of 2019 saw a continuation of the trend observed in previous quarters, namely a steady slowdown in the pace of growth.’Prices for residential properties rose by 5.8% across Germany in the third quarter compared with the same quarter the previous year, the lowest rate of growth for two and a half years. The latest growth was fuelled mainly by rising prices for owner-occupied housing (+6%), while prices for multi-family houses saw a smaller increase (+5.6%). New lease rentals climbed by 4.4%.Interestingly, residential properties in the Top 7 cities of Hamburg, Berlin, Frankfurt, Cologne, Düsseldorf, Munich and Stuttgart experienced significantly slower growth y-on-y, with prices up just 3.6% compared with the corresponding quarter in 2018. The prices for multi-family properties (+3.7%) rose marginally faster than those for owner-occupied housing (+3.4%). ‘This weaker price growth is directly related to measures such as rent caps and the rent brake, which are having an impact in the major cities in particular but doing nothing at all to solve the housing shortage,’ Tolckmitt said. ‘The trend also suggests that more and more people are moving to surrounding areas because of the price levels already reached in major cities.’

Strong demand driving up office property prices

Commercial property prices rose more steeply than their residential counterparts, up 5.9% in the third quarter of 2019 compared with the same period in 2018 yet significantly down on the previous eight quarters, according to the vdp.Growth was driven once again by office properties, where prices soared by 8.8%. This was primarily due to the persistently high demand for space against a backdrop of short supply. New lease rentals for office properties rose too, climbing by 6.8%. By contrast, there was only a marginal increase in the prices and rents for retail properties (+0.1% and +0.3% respectively). ‘The latest trend is quite remarkable,’ said Tolckmitt. ‘There is an economic downturn in Germany, Brexit is dragging on for an unbelievably long time, and geopolitical uncertainties are becoming increasingly prevalent. Yet the German property market appears immune to all this, as the ECB’s interest rate policy is more than offsetting the impact. So the current property cycle is continuing at its high level.’