
RossHelen/Envato
The financial district in Frankfurt am Main, Germany
German regulators are sharpening their warnings over risks lurking in the country’s banking sector, particularly in relation to commercial real estate exposure. The Bundesbank and BaFin have both signalled increasing anxiety about the stability of bank loan books, as property devaluations and refinancing hurdles weigh on lenders.
A Bundesbank survey indicates that banks tightened their lending criteria across all segments in the final quarter of 2024. While demand for loans remains robust, particularly for private home purchases, lenders are erring on the side of caution. ‘A deterioration in the banks’ assessment of the prospects on the residential property market had an impact on private construction financing,’ the central bank reported. This restraint is expected to continue into 2025, making it even tougher for borrowers to secure financing.
The pressure is mounting not just for residential borrowers but for the commercial property sector, where the stakes are considerably higher. BaFin President Mark Branson has identified commercial real estate as ‘one of the top risks’ for financial stability. He dismissed any notion that the market has bottomed out, noting that transaction volumes remain sluggish and valuations are still under pressure. While some landlords have offset declines through index-linked rent increases, this buffer is now fading as inflation moderates. BaFin’s latest risk assessment reveals that insurers and pension funds devalued their commercial property holdings by an average of 7% in 2023, while real estate-backed loans saw markdowns of 11.5%.
More than €100bn in commercial property loans up for renewal
For banks, the refinancing cliff is fast approaching. BaFin’s analysis shows that more than €100 billion in commercial property loans are due for renegotiation in 2025 and 2026—around 10% of total commercial property lending. Many of these loans were originally issued at rates below 3%, whereas today’s financing costs are significantly higher. A property valuer noted: ‘A bank adds a margin of perhaps 2% to the Euribor, and then we are at interest rates of around 4.5%.’ The gap between historic and current rates is forcing borrowers into difficult decisions, with knock-on effects for banks holding these loans.
The risk is particularly acute for lenders that have concentrated exposure to commercial real estate. BaFin is keeping a close watch on specialised property banks, which may struggle to absorb losses if refinancing difficulties lead to defaults. ‘Risks for banks exist primarily in the combination of loan defaults and falling collateral values,’ the regulator warns in its 2025 ‘Risks in Focus’ report. If borrowers default on their obligations while asset values decline, banks will be left holding impaired collateral, triggering further write-downs. Branson also pointed out that ‘some banks and insurers have already made considerable value adjustments and write-downs,’ referencing cases such as the collapse of Signa, which sent ripples through the market.
Open-ended property funds are also in the spotlight. While BaFin stopped short of declaring a valuation crisis, it acknowledged continued liquidity strains, particularly in special funds. Net outflows persist, and some funds have already had to suspend redemptions. The problem is exacerbated by a growing divergence between book valuations and actual market pricing, which has led to forced markdowns in funds such as Union Investment’s Uni Immo Wohnen ZBI and DWS’s Grundbesitz Europa. Investment analyst Stefan Loipfinger has warned of ‘considerable valuation risks lying dormant in open-ended funds,’ an assessment echoed by BaFin’s cautious stance on the sector. ‘There is no systematic problem with valuation,’ Branson insisted, though he conceded that net outflows are ‘still to be expected.’
KfW’s latest analysis highlights that borrowing hurdles for companies are growing. ‘A record proportion of companies reported obstacles to borrowing,’ noted KfW economist Jenny Körner. The combination of stricter lending criteria and heightened economic uncertainty is making financing more difficult across sectors, exacerbating stress in commercial real estate markets. The KfW ‘credit hurdle’ is now at record highs, reflecting widespread concerns over banks' willingness to extend new loans.
Increase in bad loans expected
Meanwhile, Deloitte’s autumn survey of bank managers indicated that a majority expect an increase in bad loans, a sentiment that aligns with BaFin’s risk assessment. The persistence of low-rate legacy loans, now maturing into a higher-interest environment, is expected to drive higher default rates in the coming quarters. ‘More companies will struggle to meet their repayment obligations,’ Deloitte concluded, pointing to economic stagnation as a compounding factor.
For investors in German real estate, the implications of these warnings are significant. Lending conditions are tightening, forcing borrowers to seek alternative sources of financing or reassess their capital structures. For institutional investors, potential distressed opportunities may emerge as refinancing pressures mount, but caution is warranted—BaFin’s concerns over valuations suggest further corrections may still be ahead. Meanwhile, those reliant on bank financing should prepare for more stringent underwriting and higher costs.
The market is now at a crossroads. While some in the industry suggest a stabilisation is on the horizon, regulators are unconvinced. Branson’s assessment is clear: ‘We cannot see that the commercial property markets have bottomed out.’ Until transaction volumes return and refinancing risks subside, Germany’s banks and investors alike will need to tread carefully.