US investors line up €2.5bn for German commercial property

A number of recent reports have suggested that the level of real estate finance available for the commercial property market has now reached pre-crisis levels, with Germany remaining a key market for deployment.

A new study by Berlin-based Flatow Advisory Partners (FAP) sees about €4.1bn in foreign capital being readied for debt finance in Germany this year, with the bulk (€2.5bn) coming from US-based investors, mainly insurance companies and funds. US lenders are followed by UK lenders (€1.95bn), French (€350m) and Swiss (€125bn).

According to the Flatow study, the volume of investment-seeking capital is nearing a magnitude not seen since the years 2005/2006. “What is not clear is whetzher there are a sufficient number of target assets available to match the return-on-equity requirements of lenders. And, while US investors are interested in Germany for the same reasons as other lenders – security, stability, and a robust economy – they have only recently rediscovered the lending market as an asset class in its own right.

Looking at where this capital is actually coming from, the predominance of foreign insurance companies is evident, as a group accounting for about €1.65bn of debt capital. These are followed by investment funds with €1.3bn, and then corporates fielding about €1bn.

FAP Managing Partner Curth Flatow comments on the purported rise in Chinese interest in entering the German debt markets, particularly insurance companies recently freed up from their traditional obligation of only investing domestically. “This is only true in so far as they have only recently been allowed to invest abroad, so they’re starting from a zero base. We obviously watching the market there carefully, but at least for Germany it’s fair to say that Chinese have not yet shown up in Germany as capital providers.”

Flatow said that his firm has responded to these new trends in debt lending and has expanded its services to include, in addition to identifying equity and debt financing for clients, advisory to domestic and international lenders. The company’s new business line “Lender Advisory – Creditor and Lender Consulting” marks the expansion of the activity to include the lending side. “Where required, FAP identifies target customers, and supports the acquisition of the envisaged deal on behalf of the creditor/lender,” he said.

“We have started to increasingly focus on advising domestic and international capital providers in developing their business strategy, in particular their access to the German market,” he said.

Meanwhile, here at REFIRE we keep a beady eye on the FAP Barometer, a quarterly reading of market sentiment relating to the financing environment, ie. whether funding conditions are becoming more or less restrictive. The barometer measurements are supervised by BulwienGesa, a leading German property research consultancy.

The latest quarterly reading shows sentiment among German commercial real estate lenders improving again, which at 1.84 points on on the FAP scale is now 31 basis points ahead of the year’s first quarter. Nearly 60% of respondents believed that conditions had improved between Q1 and Q2 of this year, with 40% rating the situation as unchanged. Not one respondent viewed conditions as more restrictive. Nonetheless, the actual pace of lenders new business seems to be lagging behind the optimistic sentiment, possibly due to increased competition and pressure on margins.

There is also a shift in the willingness to finance different property types. For example, in real estate portfolio financing, the LTV bandwidth extends from 55 to 90%, with the FAP benchmark at 71%. The spreads extend from 70 to 600 basis points, the median equalling 181 bps, down from 203 bps the previous quarter.

In project development financing, the LTV bandwidth extends from 50 to 100%, with the benchmark at 73%. Spreads have gone as high as 325 bps during Q2. The benchmark in the bottom range has remained stable at 123 bps, while the one in the medium range equals 198, another slight drop over the previous quarter.

Putting all this into perspective, CEO Curth Flatow commented, The fact that spreads continue to soften reflects the currently relaxed funding environment and the intensifying competition. The situation puts particular strain on loan funds with a senior-loan-financing strategy because they depend on higher margins for structural reasons.” In an indication of a clear trend, Flatow added that demand for alternative lenders had leapt to 38.1%, up from 28.9% the previous quarter and up from 33% during the same quarter last year. The Q2 2014 Quarterly Report can be accessed here: www.fap-finance.com/en/barometer.aspx