Real estate lending volumes to fall this year

Real estate lending volumes are likely to fall further in Germany this year, according to Anke Herz, team leader, Debt Advisory JLL Germany.

‘I’m expecting lending volumes to decrease again this year, possibly by more than 6%,’ she told REFIRE. ‘I’m expecting LTVs to remain largely unchanged - depending on the product, at around 60% to 65% - but margins could tighten even more.’

New real estate lending volumes fell again in Germany last year, despite an all-time high of €72.6 of commercial real estate and commercially-traded residential deals, as lenders continue to exercise caution against an uncertain economic backdrop.

According to JLL’s ‘New Business Report’ published this month, the volume of new real estate financing fell by 6% to €42.2b last year. Eight of the 14 banks studied reported a fall in new business, including DekaBank, whose lending slumped by 71% to just €200m, Deutsche Postbank (-38%), Deutsche Hypo (-30%), DG Hyp (-14%) and Aareal Bank (-13%). (Deka is one of the smaller lenders, so a slight change in volumes can skew lending figures.)

However, that’s not to say that lending wasn’t booming amongst some banks. Despite a fall in new business, DG Hyp still led the pack, underwriting €6.1b in new real estate loans last year, followed by pbb Pfandbriefbank, which increased its lending by 16% to €5.2b and HSH Nordbank, which increased lending by 2% to €4.7b.

Speaking at the group’s teleconference earlier this month, pbb’s CEO Andreas Arndt said that pbb would remain ‘risk averse and cautious’: ‘We’ve had a good start to 2018, which has been helped by low interest rates,’ he added.

Several other lenders have posted a good start to 2018. Aareal Bank announced earlier this month that its consolidated operating profit of €67m for the first quarter was slightly below the figure for the same period last year (Q1 2017: €71m), as expected, yet fully in line with projections. Specifically, a continued increase in net commission income, lower costs and the absence of any burdens from loss allowance compensated for the expected decline in net interest income and lower gains from derecognition, due to low early repayments.

Loan margins hit all-time low

Loan margins have also hit an all-time low: ‘Sometimes, the loan margin for an edgy office product in a ‘B’ location is just 110 bps before deducting another 25 bps for liquidity, which means that there’s not much left for administrative costs as well as to cover risk,’ Herz explained. ‘For example, on a residential loan with an LTV of just 45%, the loan margin can be as little as 70 bps, which is extremely low. A highly leveraged office product (85% LTV), on the other hand, could have a blended loan margin of between 350 bps and 400 bps to reflect the inherent risk. One problem for lenders is that no matter how tightly you underwrite loans, some will default and when margins are this low it can take a lot to cover them.’

Ultimately, lenders are increasingly having to decide whether they want to focus on loan volumes or on their risk profile, Herz warned. ‘Conservative lenders may withdraw further from the market, whereas less conservative lenders will view this as an opportunity to gain business. Some conservative lenders are even sending away borrowers if they think a deal is too risky, so the transaction is placed with the more opportunistic debt providers,’ she said.

Going forward, interest rates will likely go up and lenders could pass that extra cost onto borrowers, thereby increasing overall financing costs, Herz added. ‘This scenario may have a knock-on effect on real estate prices, albeit gradually, given the high amount of under bidder in the current market. Alternatively, if the banks don’t pass on the extra costs, their margins will shrink further, with no immediate impact on real estate pricing. It’s hard to say which of these two scenarios is more likely.’