Recent analysis from CBRE reveals a significant financing gap in Germany's commercial property market, with estimates that around €77 billion of the €228 billion borrowed between 2019 and 2022 may not be refinanced.
The gap is primarily due to decreased capital values, heightened loan interest rates, and tighter loan-to-value and interest cover ratios.
The residential segment, particularly multi-family units, faces the largest absolute gap at €35.6 billion, representing 46.1% of non-refinanceable loans. Offices follow closely at €34.9 billion (45.3%), while logistics and retail properties appear less affected.
Market Analysis:
CBRE highlights that loans from the past five years, now misaligned with current realities, are coming due for refinancing between 2024 and 2027, predicting resultant restructurings and realisations.
Germany's situation is more severe compared to the European average, with a higher percentage of difficult refinancing and a greater total value of troubled loans.
Despite slight interest rate relaxations, many properties fall short of market expectations, and looming energy-efficient refurbishments present further financial challenges.
Implications for Banks and Borrowers:
CBRE highlight how the pressure on banks is intensifying due to covenant conditions in non-recourse financing, and numerous six-month standstill agreements are approaching their extensions. They suggest that lenders might lean towards property sales if gaps to standstill agreements expand with no foreseeable improvement.
Dr. Jan Linsin, Head of Research Germany, CBRE
CBRE's assessment suggests no immediate threat to the German banking system or economy, but acknowledges increased credit risks and a more challenging credit market. Additionally, the reality is that many properties are no longer fully aligned with what the market actually wants, while CBRE expects less demand for office space generally. And a big unknown is the huge liability of unavoidable energy-efficiency refurbishments which will weigh heavily on commercial property investors.
According to Jan Linsin, Head of Research at CBRE, alternative lenders are becoming very selective. To meet their demanding expectations of returns of between 7% and 20% will be a challenge for broad swaths of investors.
BaFin warning on bank lending risks
As we report elsewhere in this issue of REFIRE, falling property valuations have been raising concerns at the financial watchdog BaFin about the exposure some banks have to vulnerable segments of the commercial property market.
In its recently published risk report "Risks in Focus 2024", BaFin highlights its fears. Since mid-2022 - i.e. since the start of the interest rate turnaround initiated by the central banks - prices for commercial property have been falling across the board. According to the Pfandbrief Banks Association (VdP), prices for office properties slumped by 10.6% in the third quarter of 2023 (compared to the same period in 2022), while prices for commercial residential properties fell by 6.8%. The decline in prices for retail properties has continued, with value corrections for retail properties averaging 20% since the end of 2019.
With no immediate market recovery in sight, BaFin boss Mark Branson has been exhorting banks to put aside more money as a provision against non-payment. "The risk provisioning ratios have not moved much in the past year and are at a historically low level. But the problems on the commercial property market cannot be denied: There is more to come than just what is currently crystallising."
Danger of cluster risks to some banks
Branson said he was concerned about the cluster risk some banks have in commercial property, as against residential property. "Some banks are very strongly focused on domestic and foreign commercial property financing and are therefore also exposed to turbulence in other countries," he said, referring to BaFin's risk report. "Like some other institutions, they have a cluster risk due to their specialisation in commercial property financing, as they cannot compensate for losses in this segment through other business areas."
"Highly specialised business models or a poor selection of properties by the banks could even cause difficulties for individual institutions," he added, emphasising that the distortions on the commercial property markets "will not lead to a systemic crisis, but will cause problems at individual banks or at least in individual portfolios."
And it's not just the banks. Large insurers, such as Allianz, R+V, LVM and Signal Iduna, are all known to have significant exposure to numerous companies within the Signa Group, now in insolvency. Branson said the collapse of Signa was unlikely to threaten individual insurance companies' existence, but he did warn that several insurance companies that BaFin was scrutinising needed to tighten up their investment policy and investment management.
