Sentiment among German lenders reaches annual high

Sentiment among German lenders has reached an annual high, in a sign that lenders are moving towards 2018 in a positive mood, according to the latest BF.Quarterly Barometer published this month.

The BF.Quarterly Barometer has risen from 0.02 to an annual high of 0.6 points this quarter Overall,  39% of the 120 lenders surveyed have a positive view of the market, up 4% q-on-q. None of them expect more restrictive financing conditions, nor do they expect any major change in interest rate policy from the ECB. As a result, demand for alternative financing instruments, such as bonds or mezzanine capital, is expected to remain high in 2018.

These were the key messages at BF.Direkt’s online press conference earlier this month, ‘New players and alternative instruments in real estate financing: Which trends will dominate the market in 2018?’, featuring Andreas Schulten, member of the board of directors at Bulwiengesa, Professor Steffen Sebastian, holder of the chair of real estate finance IREBS at the University of Regensburg, and Francesco Fedele, CEO of BF.direkt.

As Andreas Schulten put it: ‘An important trend in this quarter is that banks are taking higher risks again. Both LTVs for existing properties and loan-to-costs (LTC) for project developments are increasing considerably. The average LTV has reached 72%, the highest figure in the barometer’s history, while LTC averages 74.5% and is thus the highest figure since the fourth quarter 2014.’

However, it appears that the risks are paying off: margins for project development financing have risen to 207 basis points, up 8 basis points q-on-q. The increase for existing properties amounts to 140 basis points (up 4 basis points).

Despite this growth in risk, responsibility for lending decisions at most banks is shared equally between the new business department and the risk department, according to almost 70% of those surveyed.

Interestingly, there has been a shift in terms of what lenders are willing to lend on. Their interest in niche projects has waned and there has been an increase in lending on core properties, according to Schulten.

‘The financing focus is shifting towards traditional asset classes. Accordingly, the proportion of institutions financing office properties has climbed by 5.3% to 97.4%, residential properties by 2.8% to 94.9% and retail properties by 5.7% to 84.6%,’ he said. In contrast, the proportion of institutions financing niche products has declined. The strongest declines are in the proportion financing hotel properties, falling by 9.2% to 48.7%, and micro-apartments/student housing, also falling by 9% to 43.6%.

However, lenders increasingly need to differentiate, given the strong competition, whether that means differentiating on LTVs or on the type of assets they are prepared to lend on, Manuel Köppel, CFO of BF.Direkt, told REFIRE: ‘We don’t need to worry about rising LTVs because margins have also risen,’ he said. ‘If LTVs increase but the margins don’t, that’s a problem. Next year, I think LTVs could increase up to 75% but if margins don’t rise in tandem, will they go back to around 70%? That’s going to be the big question.’

ECB to continue its expansionary monetary policy

The ECB will continue its expansionary monetary policy, according to Professor Sebastian.

‘The ECB’s monetary policy will continue to support the favourable financing environment. At its interest rate meeting at the end of October, the ECB resolved to reduce its monthly bond purchasing volume from €60b to €30b. However, this does not mean a withdrawal from the bond market or even a reduction in the ECB’s investment, as expiring loans will first be replaced and then an extra €30b will be invested. I expect only cautious corrections even over the course of next year,’ he said.

Demand for alternative financing instruments still high in 2018

More and more investors are entering the alternative lending space, according to Fedele. ‘We are seeing increasing numbers of institutional investors of all kinds acting as property finance providers. They are involved in both senior and subordinate loans and are nearly all professional investors. Retail investors play no role in this segment.’

Fedele expects alternative property financing instruments to remain popular in 2018. ‘The ECB’s expected interest rate policy will support this. There are hardly any alternative options for investors with a comparable risk/reward profile. In addition, it is foreseeable that the boom in project developments, and thus the high demand for mezzanine capital, will persist.