Sentiment barometer plunges to record low, as bank margins rise

Not surprisingly, given the current climate, the BF.Quarterly Barometer for Q2 2020, which measures sentiment in the German professional real estate market, plumbed all-time record low depths in its latest market reading.

In its most dramatic quarter on quarter plunge on record, the sentiment reading nosedived from -3.81 points in the first quarter 2020 to -15.24 points during Q2. This represents a serious deterioration in all the parameters that make up the index, which attempts to divine the sentiment and business climate among property finance providers in Germany. The survey is prepared by researchers Bulwiengesa every quarter.

Naturallly, the financing perspective (as part of the composite of various individual scores that make up the index) was the key factor leading to the abrupt plunge in the latest sounding. Eight out of ten respondents (+72 pp) rate the situation as more restrictive, up from just 8% the previous quarter. On new lendings, more than half of the banks (58%: +46.3 pp) are preparing for a dip in new lending. Refinancing costs represent a third key factor that rhas adically deteriorated. 83.3% of the respondents expect to see refinancing premiums imminently, up from just 25% in the previous quarter.

According to Manuel Köppel, the CFO at Stuttgart based BF.direkt AG, “The Barometer’s strong motion reflects that massive impact of the coronavirus crisis on real estate financing. That being said, it captures just a snapshot. The lockdown in Germany is an external shock event that the industry will have to cope with. This time around, the survey took place at the height of the crisis, between 30th March and 10th April. I’m quite convinced that this very bleak sentiment is unlikely to persist for many months, but will improve again, although it may take time.”

Steffen Sebastian, Professor of Real Estate Financing at IREBS University of Regensburg, who acts as scientific advisor to the quarterly barometer, added: “Banks have by no means turned their backs on commercial real estate financing. But  the commercial banks in partiuclar are currently strained, not least because they have to process a flurry of funding applications under the KfW development bank scheme. Then again, it is becoming perfectly clear that few banks are in a position to handle both the classic real estate risk and the currently high level of uncertainty.” As to banks’ general new approach to lending, he confirmed that things were changing. “Banks have become more cautious during the crisis and lowered their loan-to-value ratios. At the same time, they seek remuneration for the increased exposure by raising their margins. For borrowers, this means that loans are becoming more expensive at the bottom line”, he said.

For the second quarter, margins have jumped up noticeably. In inventory financing, they rose from 131 to 147 basis points, and in property development financing, from 220 to 231 basis points. Conversely, loan-to-value (LTV) ratios in inventory financing and loan-to-costs (LTC) in property development financing were lowered significantly. The average LTV ratio dropped to 65.6% (Q1/2020: 69%) and the LTC ratio to 71.1% (Q1/2020: 73.4% ).

Köppel confirmed how the market was adapting to the new uncertainties. “We have noticed in day-to-day business that contract clauses are being adjusted within the framework of ongoing negotiations. Lenders, for example, require that higher interest-rate buffers are built into financing arrangements or that more equity capital or extra collateral, e.g. in the form of surety bonds, is provided. Banks generally prefer to collaborate with renowned and experienced developers in times of crisis who bring a robust track record to the table along with a sound equity capital basis. What matters in the current situation is that developers have ways to cope with difficulties - which may be triggered by construction delays, for example - but also that financing banks have the necessary experience to deal with covenant breaches.”