Sentiment indices underscore gloomy outlook from property lenders

Approaching the end of the third quarter of 2022, sentiment among German real estate lenders has hit an all-time low, according to the BF.Quartalsbarometer, a quarterly reading measured by Stuttgart-based real estate finance specialist BF.direkt and compiled by market researcher Bulwiengesa.

The latest reading saw the gauge plummet from -12.0 points in Q2 to -16.91 points in Q3. (The Barometer measures on a scale of -20 to +20, where +20 indicates a loose credit lending regime, and -20 a highly restrictive lending climate).

The previous lowest barometer reading was in Q2 in 2020, after the outbreak of the coronavirus pandemic, when it touched -15.24 points. This quarter, 82% of survey respondents reported financing conditions as having become more restrictive. In Q2 this year, 62% of respondents took that view of the market.

According to Manuel Köppel, CFO at BF.direkt, said: "The renewed slump in the barometer value has indeed surprised us, because the interest rate trend has not worsened since the second quarter. But apparently economic concerns are now becoming more noticeable, for example because of the worsening energy crisis. Added to this are the factors that had already led to the worsening of general conditions in the second quarter, such as rising construction costs and high inflation."

In assessing the prospects for new business, the lates survey continues the trend of the previous quarter, with one third (37%) of respondents reporting a decline in new business (plus 22 percentage points), while only about one in five (22%) reported an increase (minus 7.6 percentage points).

On the question of who enforces credit decisions within lending companies, answers differed significantly from those of the previous quarter. In the eyes of 43% of the experts, loan decisions are influenced mainly by risk departments (+19 pp).

All of the respondents agreed that the decision is no longer solely up to the new business underwriting department (-15 pp). 57% of the respondents believe that the recommendations of the risk department and the new business department carry equal weight.

Professor Dr. Steffen Sebastian, Chair of Real Estate Finance at IREBS at the University of Regensburg, and scientific advisor of the BF.Quartalsbarometer, said the development of loan-to-value ratios was speaking a clear language: 'Risk aversion runs like a thread through the survey panel. The average loan-to-value of existing properties is now only 63%, while the loan-to-cost of project developments is 67%," he said.

Lending margins increased significantly in Q3 compared to Q4 of 2019, just prior to the outbreak of coronavirus. Margins rose from 127 to 172 basis points for portfolio financing, and from 201 up to 291 basis points for project development financing.

BF.direkt's Köppel concluded, "The good news is that the financing market per se continues to function. Banks and alternative lenders are definitely willing to finance, but they're keeping a close eye on risk have their eyes on the risk and are being more selective."

REECOX Index also sees price slide

Another German index which REFIRE tracks, the REECOX Germany Index from Deutsche Hypo, highlighted the German real estate economy showing the heaviest relative fall among its European peers. This was the fourth quarter in a row where the overall reading for German real estate is negative. This quarter the gauge fell 8.7% to 289.8 points.

The REECOX is a compound index tracking the health of the real estate markets in Germany, France, Poland, the UK, Spain and the Netherlands. It uses five input variables - in Germany, for example, those are the DAX, the DIMAX, the Economic Sentiment Indicator (ESI) of the European Commission for Germany, and both base interest rates and the rate on ten-year government bonds.

Frank Schrader, head of real estate finance at Deutsche Hypo / NordLB, said of the latest soundings, "The diverse global challenges are also reflected in the Euro Score reading. While there were signs of a recovery last year, various particular events are leading to considerable uncertainties that in themselves rare as individual challenges, and have never been overcome in combination before. The real estate sector is also affected by these factors."

RICS Global Index reflecting individual country pessimism

Another quarterly index issuing a recent update is the RICS' Global Commercial Property Sentiment Index, which saw a fall to minus six pointsin Q3, after reaching plus three points in Q1.

The survey shows half of all respondents viewing their own local real estate market in a period of downturn - the most negative overall assessment yet. Among countries, there is a majority among survey participants in Germany (71%), the Netherlands (65%) and France (55%) who believe their market is in the early stages of a downturn. This is the highest proportion since Q4 in 2020.

At a global level, more than half of respondents believe that their local market could be described as either 'expensive' or 'very expensive'. For the US market, this proportion is 70%, for Europe 61% - and more than 90% consider the German real estate market expensive. "High risk, rising interest rates, global recession, limited resources are also causing market participants to hold their breath. This is leaving clear traces on the real estate market as well," said Susanne Eickermann-Riepe, the head of RICS Germany.