Sharp rise in sentiment among German property finance providers

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The latest reading of the widely-watched BF.Quarterly Barometer showed a sharp rise in sentiment among German property finance providers in Q3, although overall it remains in slightly negative territory. The Index is compiled by market research group BulwienGesa, and measures the mood and the business climate of German property financiers.

The Barometer climbed from -3.4 points in Q2 to -1.3 points in Q3 (an increase of 2.1 points). The recovery is mainly due to three improved assessments: Firstly, more banks – 28.1 of respondents (up 5.5 percentage points) – consider the market to be more progressive again. Secondly, the share of finance providers expecting growth in new business has increased significantly to 42% (up 14.3pp). Thirdly, considerably fewer banks – 19.4% (down 4.8pp) – state that liquidity costs (refinancing premiums) are rising.

Prof. Steffen Sebastian, holder of the Chair of Real Estate Finance at the IREBS business school and scientific adviser for the BF.Quarterly Barometer, explains: “Overall, a wide-scale improvement in sentiment can be observed. This is also reflected in the latest press releases from various finance providers on the first half of 2019.”

Margins remained relatively stable in Q3. The margins for existing properties saw a slight decline to 119 basis points (down 3bp), whereas the project development margins increased slightly to 203 basis points (up 3bp).

According to Francesco Fedele, CEO of BF.direkt AG: “It is striking that the average loan-to-value (LTV) has fallen significantly to 68.3% (down 1.6pp) and has almost reached an all-time low. In my opinion, however, this is not attributable to a more conservative approach by the banks, but rather to the significantly increased prices in the past. The banks’ collateral values are lagging behind the price increase, resulting in lower LTVs.”

One aspect of interest is the different and competing interests of senior and junior investors, which often leads to transactions just not happening. A number of finance providers have been referring to the high level of collateralisations claims of mezzanine capital providers, often demanding collateralization through entry in the land register (Grundbuch) or the pledging of company shares to the project company.

Fedele commented, “By their nature, these concerns on the part of the banks are based on their subjective viewpoint. In my opinion, however, senior finance providers certainly have the scope to accommodate junior investors. We are observing considerable differences in the way this is handled. If the providers of senior and junior tranches really want to implement a project, then usually a solution will always be found. For example, senior finance providers can agree to company shares being pledged. There are also options for more flexible handling when it comes to land charges.”