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Only 32.6% of property lenders will now finance retail
Germany’s property lending market is showing signs of life—but it remains a segmented and cautious recovery, with lenders still nursing bruises from the recent downturn. Residential financing is picking up pace, bolstered by renewed private demand and modest rate relief, while commercial lending continues to stagnate outside a few pockets of resurgence. Beneath the recovery lies a structural shift in how credit is extended—one with long-term implications for institutional investors.
The latest data from the Association of German Pfandbrief Banks (VdP) show that real estate lending volumes rose sharply in Q1 2025, with €36.1 billion in new financing issued—up 24.5% year-on-year. Residential lending accounted for two-thirds of the total, rising by nearly 32%, including a 51% surge in multi-family lending. Yet even this revival is tempered by constraints. New construction remains sluggish, and property supply in many cities has tightened further. As Daniel Hendel of Immoscout24 put it, demand is no longer the issue—it’s the lack of eligible stock.
On the private side, mortgage broker Interhyp now quotes an average rate of 3.62% for ten-year fixed loans, marginally down from March. Interest rate volatility—driven in part by US trade policy and ECB signalling—has led to a sideways drift in expectations. Analysts at LBBW expect rates to remain between 3.5% and 3.8% over the coming months, a view echoed across the market. The ECB’s anticipated rate cut has been largely priced in. For now, capital is still accessible, but neither cheap nor stable.
Lending against residential the clear favourite
In this context, financing activity is increasingly determined by asset class. Residential remains the clear favourite among lenders, according to the latest DIFI Index compiled by JLL and HWWI. The residential segment scored an average of 41.7 points for current conditions and expectations, up 8.4 points quarter-on-quarter. Hotels have made a notable return, now ranked second at 15.5 points—up from pandemic-era lows when barely 13% of banks would touch them. Office properties, by contrast, remain in the red. Despite modest improvements, DIFI gives offices a score of –2.2, and retail lags further behind at –9.1.
The long-term trends captured by BF.direkt’s Quartalsbarometer show just how far confidence in these sectors has deteriorated. Where once over 90% of banks were active in financing existing office stock, that figure has now stabilised between 66% and 70%. Retail has suffered an even steeper decline: from a pre-pandemic average of 70%, the proportion of institutions financing retail has halved, sitting at just 32.6% in early 2024, with no signs of rebound.
Behind the shift is not just market pricing but revised risk logic. As BF.direkt CEO Francesco Fedele notes, offices are now viewed as structurally impaired, and shopping centres in particular have lost their allure. Logistics properties, which soared in popularity during the pandemic, are seeing a gentle pullback. The peak is over, and lenders are recalibrating their exposure.
Tighter squeeze on loan margins
At the same time, margins are being squeezed. JLL’s debt advisory team reports falling loan margins across the board—most sharply in the value-add segment. Core hotels still offer the highest yields at an average of 197 basis points, while core residential deals command the lowest, at 118 basis points. Competition is a key driver. Banks and insurers are competing more aggressively on pricing to restart new business, and in many cases are showing increased willingness to stretch loan-to-value ratios.
That said, flexibility is still selective. In the core segment, LTVs now average 68% for residential and 60% for hotels. Value-add deals attract slightly lower ratios: 63% for residential, 57% for offices. JLL expects these thresholds to rise modestly in coming quarters, but underwriting remains slower, more conservative, and increasingly forensic. Financiers are paying closer attention to tenant quality, investor provenance, and sector volatility.
The DIFI Index confirms this behavioural shift. While 96% of lenders agree that US trade policy has at least some impact on German financing, most see it as marginal. More consequential is the response it triggers: nearly two-thirds of financiers now scrutinise tenant origin more closely, and 58% are applying the same caution to investor background checks. Loan decisions are taking longer—not due to red tape, but active risk management.
The rise of hybrid lending models
For institutional investors, this climate presents a dual message. Core residential is clearly back in favour—but the investable universe is constrained by poor new-build activity and rising construction costs, with February’s figures showing a 3.2% annual increase in residential build prices. Commercial segments, meanwhile, remain fragmented. Logistics, while still popular, is no longer a guaranteed bet. Hotels offer yield, but only under tight terms. Offices and retail remain deeply unfashionable, and will likely stay that way for some time—at least with traditional banks.
This is where hybrid lending models are beginning to gain traction. Deutsche Pfandbriefbank’s “Originate & Cooperate” strategy offers one such approach, combining its own balance sheet lending with capital from a curated network of institutional co-financiers. The idea is simple: offer higher leverage, bridge facilities or mezzanine tranches without the borrower having to coordinate multiple partners. In practice, it may signal the re-emergence of a club-style lending model, where traditional credit is supplemented—but not replaced—by more opportunistic capital.
It’s a model that suits the current environment: cautious optimism from banks, pent-up capital on the sidelines, and a market still short of conviction. For now, credit is available—but it is increasingly bespoke, increasingly conditional, and increasingly selective.