Germany's property financing banks have been operating extremely selectively over the past several months, opting for only the choicest financing on the most blue chip projects and funding extensions, as evidenced by a new report from broker JLL and numerous industry anecdotes.
The JLL report shows that the twelve biggest German commercial property lenders managed to increase their German lending in the first half, but not by as much as in the same period last year. They lent €18.5bn, up 3% or €1bn on last year, when the growth rate was 8% on the previous year.
JLL's Timo Wagner, head of debt advisory, said that banks were "acting very selectively on new business, with a clear focus on core and core-plus products in good locations."
The figures for the second half of this year are likely to be down heavily on these numbers. Most of the big banks have already closed their books for the year, with borrowers now likely to be knocking on the doors of alternative financiers, such as debt funds and insurers, to raise money for their endeavours.
Reports in from Germany's saving banks (Sparkassen) show that their lending in September was already down by 30% on the previous month in the prosperous states of Bavaria and Baden-Württemberg in the south. In North Rhine-Westphalia and Lower Saxony it was down by 20%, while the savings banks in the eastern states also showed hefty reductions.
The various savings bank associations have officially credited the collapse in lending to the higher capital requirements imposed on the Sparkassen, along with higher interest rates and higher building costs for private borrowers.
Private lending by the Sparkassen still represents 43% of the banks' loan books and amounted at the end of August to €1.550 billion - a record. But it has been falling steadily since March, when it hit a monthly record of €32bn. Property lending hasn't dried up completely, according to the president of the Sparkassen Association in Baden-Württemberg, Peter Schneider, as property prices have themselves started to fall slightly. "We're seeing prices giving up ground slowly and even in tight property markets like the greater Stuttgart area more existing properties are coming onto the market. There is still demand for loans, albeit not at the same level as last year and in the first part of 2022."
The JLL report on the largest commercial lenders shows large differences between the lending approaches of the biggest banks to their own home market.
Some institutions, such as Berliner Sparkasse and BayernLB, significantly increased their commitment volume by 83% and 58%, respectively. Others saw their volume shrink - at Deutsche Hypo by almost half, at Landesbank Baden-Württemberg (LBBW) by a third. DekaBank, the subsidiary of the Sparkassen which is normally more active abroad than at home, did not grant any loans to new customers in the first half of the year.
The study again names DZ Hyp as the most active real estate financier in Germany with new business of €3.8 billion (+6%). It is followed by BayernLB with €3 billion, LBBW with €2.1 billion and Berlin Hyp and Deutsche Pfandbriefbank with €2 billion each.
On size of lending book, the cooperative DZ Hyp also takes first place with €42.6 billion. Landesbank Hessen-Thüringen (Helaba) comes in second with a portfolio volume of €38.4 billion euros. BayernLB follows in fourth place after Aareal Bank, but reports the strongest increase with a rise of €3.5 billion to €29.6 billion.
Two banks saw their lending books fall - Deutsche Hypo (by 1.4%, or €0.2bn) and Hamburg Commercial Bank (HCOB) by €1.3bn or 13.1%. For the full year, only five of the twelve banks surveyed still expect an overall increase in new business. Four banks expect a decline - at the beginning of the year there were only two - while two others expect little or no change. Aareal Bank declined to offer a full-year forecast.
ULI/PwC Report casts pessimistic light on bank lending
The latest annual Emerging Trends in Real Estate 2022 report from the Urban Land Institute (ULI) and consultants PwC casts a very pessimistic light on the immediate availability of bank or third party lending. Not since the gloomy years of 2009 and 2012 have the respondents (in this case 900) been so negative on the prospects for financing.
The majority of respondents see international capital flows into European real estate receding, with the inevitable consequency of falling real estate values. 55% of the respondents believe the supply of debt for refinancing or new investment will "decrease somewhat" in 2023, with 9% saying it would "decrease significantly".
With rising interest rates and falling valuations, Germany's open-ended funds will come under pressure to sell assets to provide liquidity for fund withdrawals, respondents believe. Borrowers will incur covenant breaches, with banks applying pressure for speedier asset sales. German residential housing is falling out of favour because of what is perceived as growing "political uncertainty" against a background of an ongoing housing shortage and the government's inability to achieve its new building goals.
A recent report by investment manager AEW warned that the decline in the amount of available leverage combined with falling capital values could lead to "significant refinancing" problems for borrowers with loans scheduled to mature over the next three years.
AEW sees a cumulative debt funding gap of €24 billion across the UK, France and Germany over the years 2023 to 2025.
The ULI/PwC report warns that investment deals completed in 2018 and 2019, the years with the highest-ever volume of transactions, were particularly at risk of being unable to find lenders willing to refinance their underlying loans. Many of those deals were likely to have been made at a loan-to-value ratio of 50-60%, but with capital values falling those LTV's could soon be at 70-80%, making them unattractive to lenders.
The extent to which income from the assets would cover the interest payments due is also going to be very different from when loans were priced at 1%, with occupier performance likely to be weaker in a recessionary environment. The report quotes a fund manager saying that, this time around, with LTV's at 80%, banks are likely to act much earlier than they did in the financial crisis, forcing the borrower to stump up more equity or sell the asset, without risking the bank's own funds. And with further Basel III European Banking regulations on capital ratios coming into force in 2023, banks are going to be pushing borrowers even harder to sell assets.
