We're happy to report that the landscape of German bank lending is showing modest signs of a positive shift as recent indices reflect a more optimistic outlook from property financiers, particularly over the last quarter. Three recent indicators offer a modicum of hope that a turning point is near.
Firstly, the latest German Property Financing Index (Difi) highlights a notable improvement in sentiment among property lenders. The Difi, meticulously compiled by JLL and the Hamburg Institute of International Economics (HWWI), has surged by 25.5 points to reach -12.8 points in the first quarter of 2024. This uptick is significant compared to the previous quarter and indicates a growing confidence among financiers, albeit still in negative territory.
Helge Scheunemann, Head of Research at JLL Germany, highlights the complexity of this shift, "The significant upturn in the Difi index illustrates growing confidence among financiers, driven by expected policy shifts and a stabilizing market, though the office sector remains notably less optimistic due to high vacancy rates and shifting work patterns."
Office sector remains mired in pessimism
Aversion to the office sector is widespread, with the Difi’s sub-indicator for office properties - not surprisingly - lagging significantly at -48.3 points. And what optimism there is, is not evenly spread across all sectors. Driven by anticipated easing in monetary policies, the residential segment showcased a remarkable rise of 40.3 points, to a positive index level of 12.1, signaling a robust revival. This optimism is driven by anticipated easing in monetary policies which is expected to revitalize the market, especially in sectors less impacted by the remote work trend.
'Bank Lending Survey' confirms uptick in loan demand
Echoing this optimistic trend, the Bundesbank’s latest quarterly 'Bank Lending Survey' also captures a significant resurgence in demand for property loans in the first quarter of 2024. For the first time since the interest rate turnaround in summer 2022, several banks report they're observing a resurgence in the mortgage lending business, with the net value of banks reporting an increase in demand hitting 46%, a peak not seen in several years.
Despite these positive signs, the overall recovery in property financing remains cautiously tempered, shadowed by the sluggish performance witnessed in early 2023. The real test will be whether these early signs of recovery will translate into sustained increases in lending activity, given that lending volumes in early 2024 remained on par with the subdued levels of last summer.
Regulations and energy remain the bugbears
While the market shows signs of recovery, many hurdles persist, particularly in terms of regulatory impacts and energy costs, which remain significant concerns. "The stringent regulatory environment and the high operational costs, especially energy, continue to shape the investment landscape," said Björn Wagenknecht, Senior Director at JLL. He highlighted the critical nature of integrating sustainable practices to mitigate these costs.
To give just one example, the German Energy Efficiency Act is pushing data centres towards more sustainable operations, requiring significant adaptations in investment decisions. "Investors are closely watching these regulatory shifts as they can substantially impact the feasibility and profitability of future projects," Wagenknecht explains.
Further support from BF.Quarterly index
Moreover, a third widely-tracked indicator - the BF.quarterly barometer - from Stuttgart-based financier BF.direkt, reflects a cautious yet improving sentiment among financiers, moving from -17.98 points at the end of 2023 to -16.88 points in the first quarter of 2024. "It's a slow climb out of a deep trough, but we're seeing signs that financiers are gradually finding their footing in a challenging market," commented Fabio Carrozza, Managing Director of BF.Real Estate Finance GmbH.
Investors, like seasoned captains, are keenly navigating these turbulent waters, closely monitoring the shifting tides brought on by regulatory and economic currents. "We're noticing a cautious but noticeable shift in investor sentiment, driven by the potential for interest rate adjustments and a general stabilization of the market," Carrozza added.
As Germany's property finance sector navigates through these evolving dynamics, the coming months will be crucial in determining whether the current uptick in sentiment can sustain itself against the backdrop of economic and regulatory challenges. Still, the message from these three well-watched indices offers at least a glimmer of hope, and as such, is welcomed.
