Trend to longer fixed interest periods in resi sector

German residential market professionals are taking an even more conservative approach to their financing than private homeowners,  according to Hans Peter Trampe, managing director of Lübeck-based financial services provider Dr Klein & Co. AG. “It’s pretty rational really: they’re simply looking for the best conditions in which to pay down debt,” he says.

With advisory offices right across Germany, the long-established Dr. Klein & Co. is part of the listed Berlin-based Hypoport AG, with access to Hypoport’s EUROPACE transaction platform, which claims to handle about 10% of all German mortgage transactions.

In 2007, before the onset of the financial crisis, the average fixed interest period at the professional end of the real estate market was 10 years and eight months. Today it’s 14 years and six months. Professionals, as well as private individuals, are increasingly committing to longer fixed interest periods to avail of attractive fixed interest rates.

While the increase has been significant for private individuals too (12 years and 1 month on average so far this year, compared to 10 years and 1 month last year), the difference has been even more pronounced among professional investors, who tend to be more concerned about the prospect of interest rates changing.  

Professionals are also looking at the security offered by faster capital repayment periods, and are generally choosing to  pay down at least 2 % of the principal a year, usually more. Hence, low interest rates are used strategically to get rid of debt faster. This wasn’t possible before the financial crisis, when paying off higher amounts wasn’t feasible because of higher interest rates. “Professionals simply  know more than the average Joe Soap,” says Trampe. “They’re conscious that financial costs are on the long-term rise, especially if you consider the effect of Basel III.”

At the moment, the average private borrower is taking on a capital repayment rate of 1.97 %, compared to 1.80 % last year. “Private customers are concerned about security,” says Trampe. “But professionals are pulling out all the stops to ensure their security not just for today but for tomorrow too.”

The average loan-to-value ratio (LTV) in the German housing industry is 75 % at present. Private borrowers generally start off with less equity and borrow about 79.36 %. In the past three years, monthly LTVs have been moving steadily between 76.44 % (September 2011) and 80.22 % (January 2010).

For Trampe, the German residential real estate industry is in rude good health. “Housing companies are doing very well. While they’re investing a lot, they’re not getting ahead of themselves. They’re doing well out of the low interest rates and are upgrading and streamlining their holdings.” His advice to private buyers is to  “make sure you have your own capital, pay back at least 2 % of your loan, control your scheduled payments and choose a long-term fixed interest rate.”