German property lending growing again, but at lower margins

After several years of being on the slide, German commercial real estate loan books are now increasing again, according to research by the country’s International Real Estate Business School (IREBS) and Real Capital Analytics, and supported by the vdp (Association of German Pfandbrief Banks).

The German Debt Project, backed by the German Pfandbrief banks, found loan books rose in size by 0.8% last year. The increase is the first recorded by the University of Regensburg’s (with which IREBS is affiliated) real estate research department since 2008. “This study is important for overall understanding of the market for commercial property financing”, said Jan Bettink, chairman of Berlin Hyp and the president of the vdp.

At presentations in Berlin and Frankfurt, IREBS said the necessary ‘cleanups’ in the wake of the crisis have now been completed “to a large extent”, with the market once again growing.

The survey found that most institutions are optimistic and expect loan books to grow with new business. IREBS said 72% of the 32 surveyed financial institutions expect loan books to grow – with 32% expecting an increase of more than 5%. A weighted average loan book growth of 2.6% was predicted for this year and 3% for the next two years.

The survey found an increased willingness to lend in prime locations in secondary cities, as well as in secondary locations in prime cities. Lack of appetite for lending in secondary cities has, IREBS said, decreased significantly, as a result of rising competitive pressure and decreased financing potential in prime cities.

“Properties in Germany, even in less-favourable locations in secondary cities, are able to obtain a broad range of finance facilities,” IREBS said.

Respondents expect margins to decrease this year and next year, by about 25 basis points to about 114 bps, with loan-to-value ratios rising. The margins will shrink further towards 100bps by 2016, the survey predicts. “This is no reason for concern”, says co-author Markus Hesse, pointing to the fact that lenders increased margins gradually over the last four years, while keeping loan-to-value ratios stable and, in some cases, reducing them.

Professor Dr. Tobias Just, the Chair of Real Estate at the IREBS Institute and scientific leader of the survey, warned of the changes ahead for bank providers. "For real estate financing institutions, it is important not to rely only on the positive German economic outlook and, above all, on historically low interest rates," he said. "To escape the rising competitive pressure, it is now necessary to occupy profitable niches that offer a higher margin potential."

The IREBS study concluded that the two most important challenges for German real estate lenders are the sharp rise in competition and increased regulatory requirements.