If there was a ray of hope back in June, when the BF.Quartalsbarometer broke a series of six declining quarters in a row in reflecting a slight recovery in the sentiment among Germany's real estate financiers, those hopes have been dashed by the latest September quarterly reading.
BF.Quartalsbarometer Q3 2023
The latest Barometer reading (of -20.22) shows that lender sentiment is at its lowest-ever point, lower even than after the Lehman bankruptcy or the outbreak of the Coronavirus pandemic.
In an online presentation, organised by RUECKERCONSULT, the founder and CEO of Stuttgart-based index sponsor and financing specialist BF.direkt, Francesco Fedele, along with Andreas Schulten, long time chief representative of researchers Bulwiengesa, and Andreas Trumpp, the head of market intelligence at property advisors Colliers, all gave their take on the latest quarterly soundings.
The take-home message from the more than 100 lending professionals who make up the survey panel was clear: financing conditions have become more restrictive, banks are charging higher interest rates, and borrowers have to bring more equity into any deal. As a result, business is declining sharply, with the mood clouding over even more in the wake of a spate of insolvencies among prominent project developers over the last two months.
Industry veteran Andreas Schulten of researchers Bulwiengesa who carry out the research on behalf of BF.direkt, pulled no punches when he said "We are in a very, very restrictive lending environment." He pointed to the figures in the latest barometer reading. Fully 80.4% of the survey participants (lenders) see conditions as more restrictive, up 7.7 percentage points on the previous quarter.
Liquidity costs remain unchanged or have risen recently, say 53.5% of the survey participants, that's 2.3 percentage points more than last quarter, and is a factor in the fallen barometer value, Schulten noted. He could find few positive signals, he said. Perhaps that the share of hotel financing has increased again, but this has to be viewed in light of the overall strong decline in new business. Not all lending had died - there is still isolated large-volume financing in all asset classes, albeit at a lower level, as long as the equity share is commensurate.
Francesco Fedele, whose own personal ebullience has remained remarkably robust throughout the current downturn, and whose company's stamp is all over this Sentiment Index, views the current market phase as primarily an equity problem, more than a problem of debt financing. Those with strong equity were still buying and getting their investments financed. Either they were stumping up this equity from their own retained reserves, or they were partnering up with other developers or tapping preferred equity often from foreign investors. But the lack of price visibility was still hindering activity even from well-capitalised investors.
Fedele bemoaned the climate of general uncertainty and the role played recently by the wave of insolvencies among well-known developers, which would certainly have coloured the perceptions of the questionnaire respondents. Lenders would be doubly scrutinising of a project developers's financial viability before extending loans. So, while difficult, it was still possible to get funding - and those actively looking for funding for projects tend at the moment not to be on the immediately endangered list, he commented. For borrowers, he said, it's now about down-to-earth reality on a project. "That old flying imagination is gone, now it's down to basic old-fashioned calculation, without romantic notions", he said.
For Andreas Trumpp of Colliers, the decisive factor has now become Cash Flow, Cash Flow, Cash Flow. The current rental income has to be sufficient to cover the management costs and the financing of a property. He puts the likely realistic decline in the capital values of commercial properties since the peak at up to 25%, depending on quality and location. In many locations there is no price visibility at all, since there quite simply no deals due to lack of demand. The uncertainty of how much capex an investor would have to put into a property to make it viable is dampening the market. Quoting Prof. Dr. Gondring, about whom we wrote in the most recent issue of REFIRE, Trumpp said, "Risk can be calculated, but uncertainty cannot."
All three participants noted the recovery of the hotel and hospitality sector as the COVID pandemic subsides, and the ongoing troubles affecting the office sector, which is being assailed on all sides by mega-trends - and not in its favour.
None of the three were particularly bullish about the residential sector. Andreas Schulten was the most outspoken, with the crisis in the construction sector casting a dark shadow over the whole housing segment, and in his view, "We are probably sliding even deeper into this housing crisis." There will be little comfort in pinning too much hope on converting offices to residential to ease the looming bottlenecks. The complexities involved in such conversions are too numerous to expect salvation of the housing shortage to be delivered in any more than a handful of such projects. Overall, a gloomy perspective.
