A sliver of light at the end of the tunnel?
A sliver of light at the end of the tunnel? JLL's quarterly DiFi Index, which monitors market expectations of German property lenders and which we track carefully here at REFIRE, has at least recovered from the low point it reached at the end of 2022, and is showing a light upward trend.
While still remaining in the red - that is, expressing an overall negative sentiment towards the market - the gauge is up from a low of minus 69.7 points at the end of the quarter in 2022, it is up 31.4 points to now stand at minus 38.3 points. This is 6.2 points higher than it was a year ago.
The indicator measures respondents assessment of the 'market situation', or past six months, as well as market expectations for the coming six months. The quarterly indicator was not measured at the end of this year's first quarter, as JLL was in the process of changing its collaborative partner for compiling the index from the Leibniz Centre for European Economic Research (ZEW), to its new partner, the Hamburg Institute of International Economics (HWWI). For the latest reading, 32 active financiers were surveyed between end-April and 10th May.
Helge Scheunemann, JLL's experienced head of research, put the latest soundings in perspective. "A slowly stabilising interest rate landscape, combined with a possible end to the course of interest rate hikes by central banks before the end of this year, is likely the reason for the somewhat more positive assessment, although both sub-indicators remain in negative territory."
The unremitting downward trend of the past year does appear to have at least been reversed across all asset categories. In the latest reading, Logistics performed best with rising 45.9 points to minus 22.9 points. This is followed by hotels with minus 32.6 points and retail properties with minus 40.8 points. Worst performing was Office, at minus 50.5 points, not helped by the ongoing discussion about home offices and the announcements by large companies that they intend to reduce their office stock.
LTVs slipping below 50% across all asset categories
Notable are credit margins and leverage ratios (LTVs), which are slipping noticeably across all the five asset categories covered, and are hitting all-time lows in both the core and value-added segments. Worst hit are LTVs for logistics properties, falling 23.4 percentage points to reach 43.5%
Currently, LTVs range between 39.8% (hotels) and 51% (residential properties), according to the latest DiFi. In the value-add segment, both the lows and the declines are even more pronounced. LTVs shrink between 22.6 (retail) and 26.2 basis points (residential) and reach levels of 34 (hotel) and 39.8 percent (office). In comparing the LTVs of the individual types of use in the core and value-add segments, the smallest difference is 3.8 basis points for retail properties. The difference is largest for the residential segment, at 11.7 basis points.
Loan margins also see steep decline
Average loan margins for hotel financing in the core segment fall by 85 basis points to now 140.3 basis points - the lowest value since Q2 of 2019. For retail loans, the decline is also sharp at 77.3 basis points to 119.4 basis points.
For offices (down 40.2 basis points to 116.9 basis points) and residential real estate (down 25.1 basis points to 92.7 basis points), the declines are less pronounced.
The pressure on margins is even more pronounced in the value-add segment, especially for hotel properties, which now stands at 141.9 basis points (Q4 2022: 331.3 basis points). Margins for the retail property have more than halved (from 265.7 to 123.4 basis points). For offices, margins fell by a third to 136.3 basis points - logistics and residential forfeit about a quarter of the previous basis points, landing at 131.5 (logistics) and 108.1 basis points (residential), respectively.
"After these significant margin declines, a bottoming out should now take place," said Timo Wagner, head of debt advisory at JLL. In his view, the risk of financing is primarily reflected in falling LTVs, which are reflected in the current market phase, especially for value-add properties. Here, the relative decline in purchase prices compared to core properties is not so pronounced, while losses in value can be compensated for by new leases at a then higher rental price.