A key German indicator for the readiness to finance real estate slumped significantly in the latest quarterly reading, as a result of the sharp rise in interest rates combined with the uncertain economic outlook.
The German Real Estate Financing Index (DiFi), a sentiment indicator for commercial real estate financing surveyed quarterly by brokers JLL and the Leibniz Centre for European Economic Research (ZEW), nosedived this year's second quarter, losing 51.7 points compared to the previous quarter and slipping to minus 44.5 points. In the first quarter of this year, the DiFi fell for the first time in six consecutive quarters.
The DiFi index reflects the current assessments of financing experts, weighing up the previous six months and the coming six months. The index value is formed from the balance between positive and negative answers. Here, the current situation is deemed weaker than the forecasted outlook, (the NOW situation indicator droppng by 53.4 points to minus 55 points, the Expectations indicator deteriorating by 35.5 points to minus 48.3 points.)
According to Helge Scheunemann, Head of Research at JLL Germany, "The serious changes are a reaction to a bundle of current geopolitical and economic risk factors. The current survey is the first since the start of the war in Ukraine on 24th February this year and the negative assessments show concern about the overall economic development in Germany, which could also have an impact on the real estate markets."
The slump in sentiment in the second quarter affected all asset classes equally. Residential real estate sector was hit the hardest: the situation indicator plummeted by 66.7 points, while expectations were affected by a drop of 54.2 points. The hotel sector, on the other hand, was hit relatively moderately, but comes from an already more demanding financing level. Especially in the assessment of the next six months, hotels got off lightly: the assessment worsened by only 13.7 points. "Nevertheless, the financing of hotel properties in particularly is currently very challenging," said Timo Wagner, head of debt advisory at JLL. The sudden deterioration in the residential financing market is particularly notable: "In this market segment, lenders and borrowers are still finding each other, so that a higher level should be attributed to the residential sector", he said.
This can be seen in lender pricing. Of all asset classes, the lowest margins are still in residential real estate - even though they recorded the highest increase compared to the fourth quarter of 2021. On average, banks are charging a margin of 112 basis points for core products and 162 basis points for value-add products. But for hotel financing, the rates are 213 basis points for core properties and a credit margin of 271 basis points in the value-add segment.
A contrasting picture emerges for loan-to-values (LTVs). The average LTVs for residential properties in the core and value-add segments have fallen slightly compared to the fourth quarter of 2021, while they have risen for all other property types. In the core segment, they currently range between 60% (residential) and 73% (logistics), and in the value-add segment between 59% (residential) and 69% (logistics). "While the average LTVs for logistics properties have never been higher than in the second quarter of 2022 since data collection began in the second quarter of 2014, they are currently reaching a new low for residential properties," says Frank Brückbauer at the ZEW's Department of International Finance and Financial Management.
The estimates for the refinancing markets are also worsening, in some cases significantly. Only the market for deposits was able to slightly improve its outlook in the second quarter of 2022. The best assessments are for Pfandbriefe, while the real estate equity markets are rated the worst. It is also striking that the banks want to hold back on underwriting, i.e. direct lending. The balance of responses here stands at minus 54.4 points. "Banks are currently extremely cautious and are examining financing requests very carefully. This makes alternative lenders all the more important in the selection of financiers", said Wagner.
