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Office development
FAP identified €2.6bn of subordinated capital provided for real estate investments over the last twelve months, facilitating real estate investments and development projects with a total investment cost of about €17.5bn during the current year.
Several panel discussions at the recent Expo REAL in Munich dealt with property financing, while two timely reports in particular appeared on the future availability of loan finance, and the growing market for subordinate financing in Germany.
The FAP Mezzanine Report, published by Berlin-based financing consultancy FAP Flatow Advisory, highlighted the growing market for subordinated real estate financing in Germany, with institutions and family offices noticeably increasing their exposure to the segment. The study analysed 40 of the 146 mezzanine capital providers currently servicing the German market.
FAP identified €2.6bn of subordinated capital provided for real estate investments over the last twelve months, facilitating real estate investments and development projects with a total investment cost of about €17.5bn during the current year.
Some 49% of capital providers offer finance throughout Germany, down from 60% 12 months ago. Notable is the increase in the percentage of investors focusing exclusively on the Top 7 German cities – this year at 17%, compared with 7% in 2016. A further 34% provide financing in metropolitan regions (the 15 largest German cities), which remains largely unchanged (from 33% in 2016).
The majority of development projects are financed with capital requirements of 5% to 10%, reflecting loan-to-cost (LTC) ratios of 90% to 95% of total investment cost. The average loan-to-value (LTV) ratio on existing property stands at 88%. The number of more risk-prone providers offering LTVs above 90% on existing property has risen year-on-year. Initiators contribute an average of 12% of the market value of a property as equity.
The sectors being primarily financed by capital providers are residential, office and mixed use, with retail property and hotels also popular. Further down, but also attracting finance, are car parks, leisure property, healthcare properties and refugee accomodation. In project developments, residential topped the list along with offices and retail property.
What are capital providers earning for their involvement? According to the FAP study, expected returns of capital providers on financing for existing property range between 6% and 15% IRR, while the average return achieved is 9% (as against 9.3% in 2016). On developments, IRR expectations range between 8-18% with the average achieved return standing at 14% (14% also in 2016).
In 2015, developments were still being financed in tranches starting from €500,000. In 2016, capital providers were lending from tranches of €1m upwards, and, today, many capital providers stipulate minimum tranches of €2m . Most finance providers (73%) concentrate on tranches of between €3m and €15m. This has allowed crowdfunding platforms to expand in the range up to €2.5 million to become the leading providers in this category.
A separate study, the "Property Lending Barometer 2017" published by consultants KPMG, concludes that, as a consequence of Brexit, continental European real estate markets will benefit from increased willingness to lend on senior tranches on the part of traditional financiers, particularly German banks. The study surveyed lenders from 100 banks in 17 countries.
All lenders are currently favouring financing residential, while lending against offices is expected to rise. Hotels, by contrast, are falling out of favour, according to the KPMG study.
The first half of 2017 saw Germany (€31.8bn) and the UK (24%) together attract more than half the total real estate transaction volume in Europe, with Germany alone increasing its share by more than 30% over last year. About a third (€10.3bn) was made up of portfolio deals – with office portfolio deals in particular surging by 35%, retail deals by 20%, and industrial and logistical deals by 157%.
Hotels fell, with 44% lower transaction volume. Peak yields on average were betweeen 3.25% and 3.9% for offices, 3.1% to 3.7% for retail, and 4.95% to 5.35% for logistics properties (which at a total transaction volume of €6.67bn in 1H17 also hit a new record).