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The BF.Quartalsbarometer, an index reflecting the sentiment of financiers in the German real estate market which we track carefully here at REFIRE, is showing a modest improvement for the second quarter of 2024. Rising from -16.88 points in the previous quarter to -15.30 points, this is the highest index value recorded in the past two years, indicating a slight upward trend in market confidence, despite the ongoing gloomy environment.
A significant driver behind this improvement is the reported decrease in refinancing premiums. For the first time in recent quarters, 12.8% of survey participants noted falling liquidity costs, a stark contrast to the previous quarter where no decreases were reported. "Although the barometer value is still clearly in the red, it is the highest index value in two years. We have reason to hope that the slight upward trend will continue," commented Fabio Carrozza, Managing Director of BF.real estate finance GmbH.
Transaction volume still muted
Despite the positive sentiment on refinancing costs, the transaction environment remains challenging, the data clearly indicate. New business levels are stable, but there is a noticeable shift towards smaller individual transaction volumes. Nearly half (48.9%) of the financiers now report average transaction volumes of less than €10 million, a significant increase from the 25-33% range seen between 2019 and 2022. Larger transactions are becoming rarer, with only 11.1% reporting volumes between €50 million and €100 million, down from 20.5% in the previous quarter.
Loan-to-value (LTV) ratios and margins have shown minimal changes from the first quarter of 2024, indicating stability in lending practices. The average LTV for existing financing remains at 61.0%, while loan-to-costs (LTC) for development financing have slightly decreased to 66.2%. Margins also remain steady with portfolio financing averaging 246 basis points and project development financing at 336 basis points.
Digitalisation in lending practices presents a mixed picture. While there is potential for increased efficiency in standardised processes such as ESG reporting, the unique nature of commercial real estate financing poses challenges for broader digital adoption. "In my view, the lending business in commercial real estate financing is too individual to be able to significantly increase efficiency through digitalisation," noted Professor Dr. Steffen Sebastian, scientific advisor to the BF.Quartalsbarometer.
Market outlook and key player intentions:
The ongoing difficulties in the transaction environment and instances of insolvencies within the sector continue to dampen optimism. Risk minimization, maintaining existing customer relationships, and yield maximization remain top priorities for financiers. Notably, generating large volumes of new business is not a current focus, reflecting a cautious approach amid market uncertainties.
Methodology: The BF.Quartalsbarometer is compiled by the independent research group bulwiengesa on behalf of BF.direkt AG. The survey includes about 110 experts directly involved in real estate lending, representing various banks and financiers. The index assesses changes in financing conditions, new business development, transaction volumes, risk appetite, LTV/LTC ratios, margins, alternative financing options, and liquidity costs.
