Once a year Professor Tobias Just of the IREBS Real Estate Academy of the University of Regensburg gives his “State of the Nation” presentation – or more accurately, presents his and his team’s German Debt Project, which we regularly report on here in REFIRE. It provides a useful snapshot of the current willingness of German banks to finance real estate deals.
This year, because of the Coronavirus and the fact that all the interviews with participating financiers took place during the summer at the height of all the uncertainty, there were a great deal more diverging views as to the health of the market. Assets under management by the respondents totalled more than €212 billion.
But a couple of clear trends did emerge, such as the unpopularity of hotel and non-food retail properties. And its’s clear that a big question mark hangs over many assets in the office sector, a segment that Prof. Just described just last year as “the new housing”, in a year when 52% of commercial property investors described office as their preferred asset category. Overall new bank lending in the residential sector rose by 28.9%. And while Just said he expected hotels to start recovering in a year or two, his views for the future of classical retail were much gloomier.
Jan Peter Annecke, who is responsible for German real estate lending at Helaba, stated bluntly after Prof. Just’s presentation that this year’s annual study, the eighth overall, distinctly lacked any charm, coming as it did right in the middle of the COVID-19 crisis, and thus unable to give the clear and meaningful pointers and direction of earlier years.
As Prof. Just said, "After an 11.6% increase in new business last year, the real estate financing banks are now expecting a decrease of about 15%. There are, however, large fluctuations in the data in the interviews - that's why this is not entirely watertight. The bandwidth ranges from a huge slump of -50% to a plus of 20%. So the banks are taking very differing approaches this time around.”
One clear trend has been accentuated by the Corona crisis: Credit institutions are analyzing the financing of project developments even more closely. The share of project developments in banks’ total new underwriting business had been falling continuously since 2017. While it was 36% three years ago, the share shrank to 30% in 2019. So far this year the share is still 28%, but the differences in the weighting among the banks has been much greater than in previous years. For 2020, most banks told the authors of the study that they were fleeing into quality - "They prefer properties in prime locations with top tenants in A-cities,” said Just.
Loan-to-value ratios in 2019 for both commercial and residential new business have fallen year-on-year: from 61% and 68% in 2018 to 59% and 65% respectively. The authors of the study expect around 58% for 2020.
Meanwhile, financial institutions are expecting a further increase in the mezzanine share of financing in real estate transactions. They expecting mezzanine to account for just over 14% of investments and 9% of project developments, at interest rates estimated to be between 4% and 11%. They unanimously noted that interest rates have fallen significantly in recent years as the supply of mezzanine increased significantly.
For the future, however, they expect interest rates to rise again, but not to the level of three years ago. Particularly for investments in retail and hotels, the banks assume that the provision of outside capital will require an increase in mezzanine financing, with the banks showing such reluctance to finance assets in these sectors. This applies also to project developments, said Just, albeit at a lower level. "Regulations seem to be making the banks increasingly cautious," he said.
Meanwhile, margins rose sharply in the first half of 2020, but fell again shortly after. Some banks had indicated to him that for riskier projects, " we could have asked for any margin". For the second half of 2020, almost all banks expected margins to remain above the 2019 level.
The volume of bad loans (NPLs) in the commercial sector has remained at a constantly lower level of €1.4 billion compared to the last year, and in the residential sector it has even fallen from €600 million to €400 million. However, this is likely to change this year.
Finally, in a new category the question was asked of when interest rates might rise again. This time, six of the 24 participants questioned expected that this would only be the case after at least ten more years.
