More investors take on development risk

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More and more investors are willing to take on development risk, with project developments and forward deals surging in popularity, according to JLL’s New Business Report: Real Estate Financing, Germany, published this month.

Such deals accounted for 20% of the total last year, with that figure expected to rise yet further this year due to the lack of available properties on the market, according to the report.

Predictably, investors continue to focus on the ‘Big 7’. Last year, more than half of all deals were transacted in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart, accounting for €46b of the total of €79b.

However, new business both in Germany and abroad remains muted, growing by just 1.1% on average last year among the 12 banks who participated in the survey. (That figure does not include raising share capital or the issuance of bonds.) Six lenders – including LBBW, Helaba and Berlin Hyp reported a rise in new business last year. Five – including pbb, Berliner Sparkasse and Aareal Bank – indicated a decrease and MünchenerHyp suggested there had been no change in new business.

‘Lending went down and is now starting to go back up, although a big chunk of the market is limited by Pfandbrief legislation,’ said Anke Herz, head of debt advisory at JLL in Germany. ‘The calculation of the mortgage lending is determined by German law. For logistics, for example, that value is 10 to 11 times the rental value. However, I know of a deal where the sale price was more than 23 times that of the rental value. That means that refinancing above the 60% hurdle of the mortgage lending value is expensive, so it makes it hard to refinance.’

The strongest growth last year was reported Deka Bank, albeit from a low level. The largest absolute volume was registered by DZ Hyp, which leads with a volume of €8.7b due to its merger with WL Bank. DZ Hyp’s financing included the purchase of the RellingHaus office complex in Essen comprising around 55,000 sqm for Aegila Capital Management, the Super 8 hotel project development and Arthotel ANA Living by GS Star in Augsburg. Deka provided financing to the Ärzteversorgung Westfalen-Lippe (ÄVWL) and Hines for the acquisition of the 45,000 sqm Olympus Campus office complex in Hamburg in the form of a forward loan.

Significant increase in loan portfolios

Loan portfolios grew by around 8% y-on-y, with all banks indicating an increase. The largest increases in loan portfolios were reported by the Hamburg Commercial Bank ( previously HSH Nordbank) and MünchenerHyp, with 17% each. Helaba still has the largest loan book, at €35.3b. Hamburg Commercial Bank’s financing included the renovation of the former Reichspost central office for the Landeskriminalamt (LKA) in Berlin, whilst MünchenerHyp financed the purchase of the Gallileo office tower in Frankfurt.

However, since the ECB ended QE in December, liquidity costs have increased, Herz warned: ‘Liquidity costs are part of the margin,’ she said. ‘In addition, more of the debt is being financed outside the cover pool.’

Nonetheless, Germany’s real estate investment market is still characterised by a high level of demand and liquidity and the deal volume this year is expected to remain high, meaning that there will still be plenty of product requiring financing. Pressure on margins remains high and could increase slightly this year, according to JLL, due to the increases in regulation which is causing uncertainties in the issuance of new loans, coupled with the view of many in the industry that we are edging towards the end of the cycle. That said, many lenders anticipate doing a similar volume of new business to last year.

‘I don’t think the global downturn will have an impact on the German lending market,’ Herz said. ‘Brexit is actually an advantage – it cements Germany’s safe haven status, although it does take away the opportunity for some German lenders to lend in the UK but many of them have pulled back anyway over the last three years.’