Slowdown in German RE bank lending, but market still growing

Residential developments, logistics and hotels are driving commercial real estate lending in Germany, according to a report presented by academics from Regensburg University’s International Real Estate Business School (IREBS) at an event held in London recently by CREFC Europe.

Growth in new business has remained high at 9.1% in 2014, but it has slowed down after three years of double-digit growth (15.3% in 2011, 21.5% in 2012 and 14.8% in 2013). 'Nevertheless, the increase still represents a clear expansion in new business,’ said Tobias Just, managing director and academic head of the IREBS and co-author of the report.

The study highlights some strong trends. Looking at project financing, growth is driven by a clear expansion in the area of residential-property development, which has increased by 48% in 2014, while commercial developer financing has declined by 12.5%. ‘Immigration and urbanisation are driving the demand for housing,’ said Just's co-author Markus Hesse.

The other strong trend is the rise of ‘other’ CRE finance: 2014 saw a decline in retail (-7.1%), a modest rise in office (+2.3%) and a major jump in logistics, hotels, nursery homes and other sectors (+38.6%). ‘This major growth to €12bn in financing reflects demand from investors as well as the willingness of banks to finance developments in these sectors,’ said Hesse.

The report also found that the shift towards ‘B’ cities in Germany, which has been noted in previous years, seems to have been reversed. In 2014 the share of total new business in the ‘A7’ cities (Berlin, Munich, Cologne, Frankfurt, Hamburg, Stuttgart and Dusseldorf) rose from 54.7% to 66.3%, with Berlin recording the strongest rise of 21.7%.

Margins are continuing to fall as competition for the attractive deals increases. "Big is beautiful again," said Hesse. "Not just in terms of cities but also in size of investments, with the number of €100m-plus investments increasing substantially. We have noted an improving NPL performance, which is not surprising in a booming market, while competitive pressure remains very high and there is no prospect of it easing this year or next. The feeling in the market is that margin levels are going down."

The study has analysed a total portfolio of €212bn, covering a lending volume of €123 bn by 12 major banks, with other regional institutions and savings banks (Sparkassen and Volksbanken) contributing information. "We estimate we cover half of the total portfolio and all the main players, but there is always room for improvement and the potential to increase coverage," said Hesse.

The long-term goal of the study, now in its third year, is to contribute to transparency in the industry and to harmonise data, said Just: "Even within Germany lenders have different data sets, while the Sparkassen want to co-operate but do not have the systems in place to separate the data, so aggregation is very difficult. Hopefully the regulators are coming on board to make sure that in future we can all read from the same page."

The German market offers more choice, as it is substantially more decentralised than the UK, but the same trends can be seen in both countries and indeed across Europe, according to research presented by Cushman & Wakefield. "The noticeable change has been the 550% increase in non-bank debt between 2008 and 2014, while bank CRE debt has declined," said Nigel Almond, head of Capital Markets Research at C&W. "More alternative lenders, institutions and funds are coming in."

The majority of the €1.8 trillion of outstanding debt in Europe is concentrated in a few markets, notably the UK, France and Germany, showing that deleveraging has been very limited even after the crisis. "Notable progress in the reduction of outstanding debt has been made only in the UK, Spain and the Netherlands," said Almond.