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The real estate lending landscape in Germany is showing signs of cautious optimism, especially among Pfandbriefbank lenders. Like a cautious gardener tending to a delicate plant, lenders are seeing a slight uptick in new business volumes.
According to recent data from the Association of German Pfandbrief Banks (VdP), the first quarter of 2024 has seen a slight increase in new business volumes. The total real estate financing volume of VdP member institutions reached €27.0 billion, a 4.7% increase from the same quarter the previous year and a 3.1% rise from the previous quarter.
The uptick was primarily driven by stronger lending for residential properties. Residential real estate loans totaled €17.8 billion, marking a 7.2% annual increase and a 17.1% quarterly jump. This represents the best quarterly result since Q3 2022. Jens Tolckmitt, Managing Director of VdP, noted, "Residential real estate financing is sending positive signals. Rising real wages and stable loan interest rates are having a positive effect on the financial scope of private households." If so, it seems like the real estate market is finally shaking off its winter chill and blooming into spring.
However, the commercial real estate sector remains more subdued. The volume of new commercial property loans stood at €9.2 billion, unchanged from the same period last year. Office property loans dominated, accounting for €5.5 billion, a 19.6% increase from Q1 2023. Retail property loans, however, fell sharply by 29.6% to €1.9 billion.
Tolckmitt highlighted that while residential real estate shows promise, institutional investors remain cautious. "The start to 2024 has been subdued for the financing of rental residential buildings and commercial real estate. Nevertheless, we expect the overall real estate financing business of the vdp member institutions to grow compared to 2023 thanks to the anticipated positive trend in residential real estate loans," he added.
BF.quarterly barometer reflects mixed sentiment
Complementing the VdP's findings, the BF.quarterly barometer, which gauges the sentiment of property financiers, also shows a nuanced picture. The sentiment index rose slightly from -17.98 points in Q4 2023 to -16.88 points in Q1 2024. While still negative, this marks the second consecutive increase from the all-time low of -20.22 points in Q3 2023.
Fabio Carrozza, Managing Director of BF.Real Estate Finance GmbH, observed, "In our day-to-day work, we are also seeing that new business is picking up somewhat." This improvement is particularly noted in portfolio financing within the €10 to €50 million range, primarily in the residential sector. However, he cautioned that the overall crisis is not yet over, despite financiers and borrowers adapting better to challenging market conditions.
The barometer also noted a slight improvement in financing conditions, with more experts reporting unchanged or improving conditions. However, liquidity costs remain a concern, with 55% of respondents indicating that costs have either remained the same or increased recently. Carrozza explained, "This probably reflects the increased market risk that banks are currently exposed to."
Grounds for optimism?
While the overall sentiment remains cautious, there are grounds for optimism. The slight uptick in residential lending and the gradual improvement in the BF.quarterly barometer suggest a stabilizing market. Prof. Dr. Steffen Sebastian, scientific advisor to the BF.quarterly barometer, added, "There is hope that inflation will continue to weaken and that the ECB will lower interest rates over the course of the year, which could provide fresh impetus for the property sector."
However, the market is still grappling with the challenges of high liquidity costs and a cautious approach from institutional investors. The long-term trend in margins shows a slight dip, with portfolio financing margins currently at 247 basis points, down from 262 basis points in Q4 2023.
Key takeaways
Residential Real Estate Lending: Showing positive signs with increased lending volumes, driven by rising real wages and stable interest rates.
Commercial Real Estate Lending: Remaining steady but subdued, with office properties leading the segment and retail properties seeing significant declines.
Sentiment Among Financiers: Slightly improving, with the BF.quarterly barometer indicating better new business prospects and financing conditions.
Challenges Remain: High liquidity costs and a cautious investment climate continue to weigh on the market.
In conclusion, while the German real estate lending market is not yet out of the woods, the data points to a slow but steady recovery, particularly in the residential sector. Strategic investments and supportive policies will be crucial in sustaining this positive momentum.
