A high-rise building
Germany's main real estate lending banks saw their new business underwriting for the residential sector collapse by 49.2% to €16.3bn in this year's first quarter. Last year in the same period the volume was a record €32bn, as investors rushed to lock down deals at favourable interest rates, in anticipation of the coming rise in rates a few months later, which of course duly came.
The figures relate to member banks of the Association of German Pfandbrief Banks (vdp), effectively all the big lenders including Deutsche Bank, Commerzbank, the Landesbanken and the big Sparkassen.
The lending figures do mask strong differences according to asset classes, however. The figures for new real estate lending, as against just for residential, actually rose by nearly 20% to €25.6bn, up 3.2% over the previous quarter. This is still 47.8% below the corresponding period last year. This demand for financing is likely to stay depressed until the current phase of uncertainty about pricing and interest rate movements is resolved, said vdp president Jens Tolckmitt, presenting the latest figures.
On the residential side, does this represent the banks being more restrictive, or a collapse in demand on the part of borrowers? According to a useful recent study by Barkow Consulting, demand has actually recently been showing an uptick, but, against a background of slightly falling prices, the banks have heavily increased their credit checks at Schufa (for creditworthiness) and increased scrutiny of a potential borrower's ability to repay under stress conditions. They're also looking for more equity, which many borrowers can't stump up. Hence the high rate of refusals.
Tougher times ahead for commercial properties
Tobias Dichtl, co-head of Market Intelligence at broker Colliers, says that commercial properties financed during the last boom phase of the low-interest environment are going to have a particularly hard time. "With financing maturities of five to ten years, which are typical for the market, many of these financings will expire in the coming years. Their refinancing will then take place in a market environment with fundamentally changed conditions," he says.
Colliers has identified a debt gap of €28 billion for the German commercial real estate market over the next seven years, equivalent to 14% of capital employed. A good two-thirds of this, or €19 billion, is likely to occur by 2026 alone.
According to Colliers, this gap represents a noticeable headwind for the transaction market, as equity capital required for refinancing is lacking for the purpose of new investment. In addition, the capital gap may have a negative impact on asset management, for example if capital originally earmarked for maintenance or refurbishment now has to be used for refinancing. Colliers estimates that the annual transaction volume is likely to be reduced by 5% to 15%. Despite this, it says it's not expecting a crash in transactions, or even large-scale distressed sales.
New report by JLL highlights lending retreat by big banks
A new report by JLL on lending against German property by twelve of the biggest banks shows their commitment volume in 2022 was down by 2% on the previous year, at €38.8bn.
Seven of the twelve banks granted fewer loans in 2022 than in 2021, with Landesbank Baden-Württemberg (LBBW) recording the most significant decline at three billion euros (down 42 percent). On the other hand, five banks also recorded an increase in new business, including Landesbank Hessen-Thüringen (Helaba) with growth of €1.2 billion to €4.0 billion (up 43%) and BayernLB with an increase of €1.3 billion to €6 billion (up 28%). The most active real estate financier in 2022 was once again DZ Hyp, which achieved a new business volume of 7.8 billion euros (minus five percent).
This year, the negative trend could continue. Seven banks, for example, expect a further decline in new business. Only two banks expect the volume of new business to increase compared with 2022, and Hamburger Commercial Bank (HCOB) sees new business in 2023 at a similar level to the previous year. Both DZ Hyp and Helaba did not provide a forecast for 2023 due to the current difficulty in assessing the market.
"The banks are currently cherry-picking and are still acting extremely risk-sensitive. This is being felt above all by project developers, who are increasingly having to turn to alternative lenders to obtain financing," says Timo Wagner, responsible for Debt Advisory at JLL Germany. Overall, however, there is sufficient liquidity on the market: "We are far from a credit crunch, but the price for liquidity is relatively high," stressed Wagner.
Still, apart from the fall in writing new business, the overall value of the twelve banks' loan portfolios rose by 5% to €289.9 billion (due to extensions). For 11 of the 12 banks, their loan book increased year-on-year; only at HCOB did it fall (by 2%).
As in the case of new business, BayernLB reported the largest increase in its loan portfolio. With a plus of €2.4 billion, it is thus just ahead of Helaba, where the volume increased by two billion euros to a total of €38.8 billion. This makes Helaba the country's second-largest real estate financier behind DZ Hyp (€42.7 billion).
Concerns about loan default risks
In addition to the figures on new business and loan portfolios, which are surveyed on a regular basis, banks were also asked about loan default risk and loan application volumes. When asked which factors currently have the greatest influence on credit default risk, a clear picture emerges: the majority of banks see the rise in interest rates as posing the greatest risks. In addition, three banks regard the loss of value of collateralised properties as a risk of loan default.
Seven of the banks surveyed claimed the risk of loan default has not changed in the course of the past year. Only two banks perceive an increased risk of loan default in the current market environment, while three provided no information.
