Growing appetite for risk by capital providers for German property

The last year has seen growing appetite for risk by providers of capital for German commercial real estate, according to the latest study by Berlin-based financing consultancy FAP Flatow Advisory Partners.

The latest FAP Mezzanine Report, published in time for the Expo REAL in Munich recently, shows that, with investor hunger for alternative real estate projects, developments can now be financed with capital requirements as low as 2%-7%. Projects at the upper end of the scale are being financed via subordinated capital at loan-to-cost ratios of 93-98% of the total investment cost.

According to FAP founder and managing partner Curth Flatow, “The formula is simple – capital is seeking deals. We are in a booming market with a positive outlook. The search for alternative investments is intensifying and capital providers are increasing their appetite for risk and/or lowering their ROI requirements.”

The study was based upon feedback from 40 of the 97 national and international mezzanine capital providers currently active in the German market. These include funds (60%), private banks (8%), investment companies (5%) and insurance companies (3%).

A measure of the increased risk appetite is that the provision of subordinated capital over the last twelve months has risen by 51% to reach €1.4bn, equating to a market value volume of about €7.4bn, up 36% on the previous year.

FAP managing director Jörg Scheidler says he is expecting further growth in this current year, as "the subordinate financing market segment has meanwhile discernably established itself as an asset class for investors."

It is now possible to finance developments with average capital requirements as low as 2%-7%, says the FAP report. This in turn means that projects are being financed via subordinate financing at LTC ratios of 93-98% of total investment costs.

For existing property, the majority of capital providers apply a maximum loan-to-value (LTV) ratio of 85% of market value, with a capital requirement of 15% currently standard. However, the proportion of more risk-tolerant investors offering LTV ratios above 90% has increased, says the report. 

The report also covers the asset categories most favoured by capital providers. For existing properties, the favoured sectors are office, shopping centres/retail parks, and retail. Surging up the list are micro-apartments, now financed by 65% of respondents (compared to 33% last year), followed by nursing homes/healthcare (39% of capital providers) up from last year's 17%.

For project developments, the favoured sectors are residential, office, and shopping centres/retail parks. Here again micro-apartments climbed in investor favour to 77% (up from last year's 38%), warehouses/logistics at 58% (from last year's 38%) and hotels at 55% (up from 25% in 2015).

On returns, capital providers expect yields of 8%-12% IRR on existing property, with the average return being 9.3%, a fall of more than 1% compared to 2015. For developments, return expectations range between 12%-18%, with the average actual return coming in at 14%.