The corona crisis will noticeably depress the earnings and profitability of commercial real estate financiers in Germany, according to a new study by Bain & Company. The management consultants have tried to quantify just how much these lower earnings will be.
Commercial real estate financing has been a reliable source of income for banks and savings banks in recent years. Falling margins were more than compensated for by more new business, and historically low risk costs also ensured steadily rising profits. According to Bain & Company’s calculations, German earnings on property lending in 2019 totalled €14.9 billion and profits reached €4.6 billion. Both figures represent a peak, if the consultants are to be believed. In the wake of the corona crisis, earnings and profitability are now coming under pressure.
Without the pandemic, lenders' revenues would have risen by €0.6 billion to around €15.5 billion in 2020. Now the estimate assumes a decline of €1.2 billion to €13.7 billion. In 2021 things should look a little better again: Bain & Company expects earnings to grow to €14 billion.
The consultants cite the example of the increased lending at the co-operative Volksbanken and Raiffeisenbanken whose annual growth in lending was 6% over the past five years. Their loan portfolios grew by €80 billion since 2014 to reach €599 billion in 2019. Low interest rates have been encouraging investors into new construction of new residential and office buildings, along with expansion into the outer suburbs – this, despite falling margins, led to higher volume and amount of loans granted, against a background of low or negative interest rates for bonds.
The outlook for earnings is gloomier because the "one-off favourable cost constellation" of the past years will end in 2020. Capital and risk costs are rising again. In combination with lower earnings, this will lead to "a considerable decline in the profit pool in the next two years". Profits will shrink this year to around €3.7 billion, below the level of 2014. Further losses are expected in 2021. Nevertheless, Bain & Company notes that commercial real estate financing remains a profitable business for banks "even in what is probably the worst recession in German post-war history".