Five EXPO takeaways

Macro-economic prospects, challenges for investors, and bankers’ efforts to cope with low margins were among topics of discussion at this week’s EXPO Real fair in Munich.

In the first week of October, there’s only one place for Europe’s real estate finance professionals to be; the closing nights of Munich’s Oktoberfest, followed by a more sober visit to the annual EXPO Real fair at the city’s exhibition halls.

As the second day of the three-day event draws to a close, some of the major talking points are becoming clear. Here is a flavour:

1. Economics, rather than politics, is front-of-mind.

At the 2016 EXPO, politics dominated conversations. Brexit was fresh in people’s minds, elections were looming across several European countries, and a Trump presidency in the US was becoming a real prospect. A year on, real estate people are more focused on economic fundamentals, including monetary policy and the possibility of interest rates increasing in the UK. The continued healthy performance of European economies and the implications for property market fundamentals were also discussed.

It isn’t that politics is off lenders’ agendas – far from it – but they have got used to operating in a climate of political uncertainty. “The big wave of uncertainty seen last year is over,” a German lender said. The Catalan crisis, however, suggests geopolitical risk is here to stay.

2. Investors, and lenders, need to work harder to source deals.

Germany, like Europe’s other core markets, is peppered with a handful of mega-deals. Oxford Properties’ €1.1 billion purchase of Berlin’s Sony Centre was one deal that attracted plenty of buzz at EXPO. Germany’s institutional investors are also active, although their deals often get financed through equity by major insurance companies or open-ended funds. It means fewer opportunities to lend.

Investors’ hit rates are also down. Georg Jewgrafow, chief executive of Bayern LB-owned investment manager Real IS, told Real Estate Capital’s sister title, PERE: “If you had 200 opportunities to bid, the hits might be 10-15 percent.” The issuance of ‘letters of intent’ when bidding is an increasingly useful tactic for winning bids, he added. “On LOIs, the ratio is more like 40 percent.”

3. Cluster avoidance is key

German institutional investors remain committed to their domestic investing programmes, according to a survey of investors accounting for about €60.5 billion of assets by German fund management giant Universal-Investment. The poll, published at EXPO, noted, however, that in a bid to avoid investing in concentrations, appetite has grown for other European markets; 30.8 percent want to buy in Europe today versus 25 percent last year. Less so Asian markets, however. While 8 percent of respondents wanted Asian investments last year, just 3.5 percent want them now.

4. German bankers still hope margins have bottomed out

German lenders have remained disciplined and risk-averse during this prolonged market cycle. Some report that there are banks moving gradually up the risk curve, but, on the whole, Germany’s real estate bankers remain a conservative lot. That means most continue to chase stabilised, low-risk financing opportunities, with competition in the market showing no signs of abating.

It has become a familiar refrain, but German lenders remain hopeful that senior margins have now reached the bottom. However, most still accept that, for a 50 percent loan-to-value senior loan eligible to be funded through Pfandbriefe, loan margins remain below 100 basis points. In the senior space, German banks are still underbidding each other and competing on pricing.

5. Banks are cutting elsewhere to off-set low margins

Cost-cutting is happening as lenders mitigate for low senior margins. In a move to outsource servicing, Aareal did a strategic partnership with Mount Street at the beginning of this year and Berlin Hyp is looking into digitalisation to cut costs and optimise internal processes. Banks are considering options for generating higher-margin business. Berlin Hyp announced the acquisition of a stake in the financing platform BrickVest in a move that takes forward the lender’s digitalisation strategy while diversifying its revenue streams. In future, the bank could provide senior debt financing through the platform.