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Lending Market
The Evangelische Bank operates as a co-operative, sustainable lending institution, with a balance sheet of €7.1bn, placing it in the top ten co-operative banks. It employs 480 staff from 13 separate branches, looking after 19,000 institutional and 72,000 private clients.
Germany’s lending market appears to be losing its mojo, according to a raft of data published over the summer.
Sentiment has deteriorated among German lenders since the second quarter, according to the BF. Quarterly Barometer published earlier this month. The barometer fell from 0.49 points to 0.02 points in the third quarter.
The shift is largely due to the growing share of respondents who view institutional lenders, such as insurance companies and pension funds, as viable alternative lenders, thereby intensifying competition for business. Almost 37% of respondents said they view such firms as alternative lenders, up 11.1% q-on-q.
‘While sentiment among property finance providers has deteriorated, it is still relatively good,’ Francesco Fedele, CEO of BF.direkt, which published the survey, told REFIRE. ‘It is true that higher ratios are being accepted on the market (both LTVs and LTCs) and margins have increased at the same time but the increases are only moderate. This shows that the market still works when there is high pressure on property prices. Banks can get higher prices for higher risks. Or, to flip that around, borrowers have to pay more for higher loan-to-value ratios.’
According to Dirk Richolt, head of real estate finance at CBRE in Frankfurt, it was inevitable that the lending market ‘would trend down at some point’: ‘It’s a great time for borrowers, albeit not so much fun for lenders,’ he said. ‘Part of the problem is that for Pfandbrief refinancing purposes, mortgage-book values are static, so they don’t reflect actual market prices. The winners today are those with the most equity in a deal, which also makes it difficult for lenders. There is a shortage of supply, which is driving prices up. When the ECB stops buying fixed-income assets, it could ease the pressure and low QE may stop yield tightening.’
Increasing investment pressure
As a result of investment pressure, institutional investors are looking for new niches and are now increasingly operating as finance providers. ‘This is driving up the already high competitive intensity and exacerbating competition,’ Fedele said.
Renewed competitive pressure is also reflected in the lending focus. The share of institutions that name maintaining customer relationships as the most important aspect in lending hit 21.8%, the highest level since surveys began.
High prices for classic property types – office and retail – is also increasingly driving investors and project developers into niche markets, according to Fedele. ‘The banks are following the trend and taking on more and more in this field: the micro-apartment segment is now being financed by every other provider,’ he said.
Almost 58% of respondents said they would finance micro apartments or student housing. Social properties, such as nursing homes and hospitals, are also up by 4.1% to 33.3%.
‘Like other lenders, we receive more requests to fund niche products, such as student housing and nursing homes,’ Gerhard Meitinger, head of real estate finance Germany at pbb Pfandbriefbank, told REFIRE. ‘We’ll selectively lend against these assets depending on the sponsor and/or the operator, providing there is strong demand in a specific micro location. We focus on the ‘Big7’ but are not limited to these cities. However, we wouldn’t finance developments for nursing homes as the acceptance for a scheme is difficult to predict.’
Other lenders are embracing project development. Margins for project development financing rose significantly to 199 basis points (up 14 basis points). At the same time, the average loan-to-cost (LTC) ratio in the segment climbed to 73.8% (up 0.6%).
‘The rise in LTCs over several quarters and the greater margins for project developments show that the market is working. Higher loan-to-value ratios for banks are countered by higher income and a higher risk buffer. There are no discernible signs of a potential bubble here. There is no surplus of supply on the financing side,’ said Manuel Köppel, CFO of BF.direkt AG.
More lenders are financing development projects because of increased competition and the fact that there are fewer longer-term loans, according to Richolt. ‘Interest rates are also very low, so developers don’t need to show so much pre-leasing to satisfy lenders,’ he said.
The margins for existing financing have also risen slightly from 131 to 136 basis points. LTVs are virtually unchanged at 71.5% (up 0.2%).
Nonetheless, the 120 respondents made it clear that they will not lend on just anything: around 60% of those surveyed said that financing was not provided because project risks were too high or because the borrower had a poor track record or their equity share was too low.
There has been no sizeable change in the financing of office and residential properties. Around 92% of respondents said they would finance both asset classes. However, only 79% said they would finance retail assets, down from 84% in the second quarter.
Sentiment still in minus territory
According the German Real Estate Finance Index (DIFI), which is published quarterly by JLL in conjunction with ZEW, Germany’s lending market sentiment started to move downwards between the first quarter of 2015 and the first quarter of 2017 and the index is still in minus territory, despite gains, according to second quarter results published in June.
‘Nonetheless, in contrast, business development in Germany increased by 15% last year,’ said Alexandra Kucera, principal consultant, Debt Advisory at JLL.
Deutsche Hypo announced on 9 August that its new business volume was up by 17% in the first half of 2017. Areal, on the other hand said earlier this month that new business was down 14% in the period. Meitinger at Pbb told REFRE that, at €4.5b during the first 6 month of 2017, pbb’s new business ‘exactly matched the volume for the first half of 2016 - though less transactions are coming to market’.
‘Based on those figures alone, it’s hard to see where the market is moving, but the majority of banks have already forecasted a stable or lower new business volume,’ Kucera said. ‘That said, we see that most banks are still cautious when it comes to lending and look very closely at future exit possibilities.’
In the second quarter of 2017, the DIFI increased from minus 12 to minus 5.5 points, marking the first time the financing barometer has improved for over a year. Nonetheless, it has remained in negative territory for two consecutive quarters, which suggests that sentiment in the market for commercial real estate financing remains subdued and has steadily declined since reaching a record high in 2015.
DIFI’s survey respondents expect conditions to deteriorate over the next six months and, although the corresponding aggregate also increased by 6.3 points, it remains firmly in negative territory at minus 16.3 points. However, the lull in financing conditions anticipated for around a year has still not really transpired to any major degree. Above average transaction volumes were recorded in the real estate investment market in 2016 and, despite competition amongst financing banks, 2016 was a record year for new business.
This year, however, clients are craving more simplicity, according to Meitinger: ‘In Germany we see an increasing demand for loans with less complex structures,’ he said. ‘Opportunistic investors will ask for higher leverage – which some of them will achieve via a mezzanine piece in the structure - but other investors only ask for 40% to 50%,’ he added.
Lending volumes unlikely to surpass 2016 level
On balance however, financing expectations remain on a downward path, according to JLL, which is likely due to a shift in the pressure on margins across all asset types and to the regulatory environment which is still perceived to be onerous.
One thing seems certain: real estate lending volumes this year are unlikely to surpass last year’s levels, according to Fedele: ‘In 2015 banks provided €36.1b in finance for commercial properties; in 2016 the figure was €41.6b. I assume that the level will be below that of 2016 by the end of 2017. There are very few major portfolio deals taking place and there is a big shortage of properties.’