German refinancing and lending indices reflect plentiful liquidity

Property advisor CBRE has stepped into the breach with a new market index for German real estate refinancing costs, after the “vdp-Pfandbriefkurven” index, published quarterly by the VdP Verband deutscher Pfandbriefbanken (Association of German Pfandbrief-Issuing Banks) ceased publication of their yield benchmark index in April this year.

The CBRE index, likewise to be published quarterly, shows refinancing conditions relaxing, and at 40 basis points are a full ten points lower than in January this year, about 80 bps below their average at the beginning of 2012, and practically back at the levels they were at before the financial crisis. In other words, the cost of financing is unlikely to get much cheaper than it is now, say the CBRE researchers.

Meanwhile, we regularly report on the FAP Barometer, another quarterly reading which taps into the well of lenders for German commercial real estate loans to take the temperature of the lending climate directly from lenders themselves.

This quarter (Q3 2014) the FAP Barometer climbed by 65 basis points to +2.48 barometer points, its highest level since Q4 2012, its highest score of the year to date, and also of the past four quarters in 2013. This represents a very favourable lending environment.

According to Curth-C. Flatow, founder and managing partner of FAP, “The reasons for the bright mood continue to include the favourable interest environment, which seems to have seriously boosted demand, and the robust business cycle which makes German real estate portfolios attractive even for foreign investors. Time will tell to what extent the situation will remain stable.”

“We assume that the euro is slowly but steadily coming under pressure on the world's financial markets, and that the time of low interest rates is over. Then again, turmoil on the financial markets is not to be expected. The robust German economy will cope with the slow withdrawal of the liquidity glut, which would, in any event, not be healthy for it in the long run.”

This quarter’s survey respondents clearly view financing conditions as very favourable. For the first time, more than 60 percent rated conditions as more progressive than the previous quarter. None of the survey respondents reported a more restrictive market situation, while nearly 40% rated the terms of financing as unchanged.

As for new business, 48% of respondents said their lending would increase in the quarter, while 38% said their lending would remain stable. Niche segments are becoming more important, such as entertainment or health/wellness facilities, at the expense of other niche categories such as micro-apartment or hotel properties.

Respondents indicated that existing property margins keep softening, while project development margins harden. In portfolio financing, the benchmark LTV ratio remains unchanged at 71%, with spreads extending from 60 to 450 bps, with the median being 167 (down on the quarter from 181). In project development financing the benchmark was 73%, while spreads were 129 to 301 bps, with the median being 205 bps, up from 198.

Importantly, more than 85% of respondents expected that the expanded loan supply will imminently encourage higher financing ratios, while the role of alternative lenders is expected to grow stronger still.