ZEW, JLL's financing sentiment index falls back in second quarter

After seeing an improvement in sentiment at the turn of the year, German property financing sentiment has fallen back in the second quarter to levels seen last autumn, according to the latest reading of the DIFI Index, managed by property advisor JLL and the ZEW Centre for European Economic Research.

The index dropped 6.7 points for the quarter over 1Q16 to 8.3 points, and a full 20 points on 2Q15, with the decline most pronounced in the retail and logistics sectors.

The sentiment baromer for the financing environment over the past six months fell by 6.2 points, while expectations for the coming six months showed a 7.3 points decline, both indicating rising pessimism. According to Markus Kreuter, team leader for Debt Advisory Germany at JLL, “What we're seeing is, on the one hand, the financing environment profiting from the continued expansive monetary policy of the ECB. And on the other, uncertainties arising from the Brexit referendum and the development of the immigration of refugees into Europe acting to dampen market expectations.”

Helge Scheunemann, head of research at JLL Germany, commented: "The somewhat more sceptical assessment of the financing environment and more pessimistic expectations affect all asset categories." However, the biggest falls were in the retail and logistics sectors, with retail losing 8.4 points, and logistics 13.4 points on the previous quarter.

Oliver Lerbs, deputy head of financial markets at the ZEW, added: “Meanwhile, the economic basis remains surprisingly positive. Estimates show that first-quarter GDP rose by 0.7% compared to the previous quarter.”

However, the good news is that prospects for the refinancing markets have picked up again. “The development mirrors a correction of the pessimistic outlook caused by the stock market turbulences at the beginning of the year,” said Kreuter, adding that Pfandbriefe and mortgage-backed securities were being viewed as most positive.

The latest DIFI survey also included questions on market-typical margins and loan-to-value ratios. Margins range between 110 bps and 150 bps for core office, retail and logistics assets, and at around 90 bps for residential assets. This indicates that margins have picked up against 2015 but are still below those of 2014. For value-add assets, they range between 170 bps and 210 bps in the commercial sector, and at 130 bps for residential assets.

LTVs have fallen for core financing, while they remained stable for value-add. An exception is logistics properties – for those with LTVs of 70% or higher, margins have risen by 12 bps and by 16 bps in the value-add segment, compared to last year.