Weak start for sentiment among German finance providers

It’s not been a strong start to the year for sentiment among German property finance providers, according to the monthly BF.Quarterly Barometer, the index published by BF.direkt AG, the Stuttgart-based project financing specialist, and prepared by market researcher BulwienGesa.

For the first quarter of 2018, the barometer fell from 0.6 point 0.23 points, which while still indicating a ‘balanced financing market’ overall, shows a rise in caution among financing banks, with only 24% of those surveyed seeing an improvement in market conditions (down 14.4 percentage points. More than half of respondents (54%, a rise of 5.5 percentage points) said that new business is currently stagnating - a record for the index - with the average credit volume for new business now actually shrinking. This is resulting in a higher share of financing on lower-volume deals (less than €10m) with banks switching to smaller deals due to the shortage of properties on the market.

In terms of bank risks, the latest reading shows bank LTVs on existing properties down 0.5% and LTCs (loan to costs) on project developments down 1%, but still close to the previous quarter’s high LTVs of 71.5% and LTCs of 73.5% respectively. Margins on project developments have risen by 27 bps to 208 bps since Q1 of 2017, while margins on financing existing properties have risen by 8 bps to 143 bps since the Q2 of the previous year.

What is being financed? There is a slight shift towards niche products, in both project developments and existing properties, with core segments in office and residential declining somewhat. For existing properties, micro-apartments (up 1.4%) and hotel properties (up 1.3%) are in favor, while logistics is the strongest segment among project developments (up 1.6%), trends observable over the last several quarters.

Counter to the long-term trend, the banks surveyed state that demand for alternative financing instruments is decreasing slightly (35.9%, down 7.8 percentage points). Among the different forms of alternative financing, mezzanine capital is still the most commonly used at 46.2% (up 7.3 percentage points), followed in second place by forms of equity finance such as private equity and joint ventures at 26.9% (up 10.2 percentage points).