Five things to know about the German real estate credit market amid covid-19

For multiple reasons, Europe’s biggest property market has been an outlier in the region during the course of the pandemic.

German real estate lenders, like their counterparts in the rest of Europe, switched on the defence in response to covid-19 by either putting deals on ice or raising margins and lowering LTVs.

Yet Germany is the real estate credit market that has bounced back the strongest in the region, propped up by a generous fiscal stimulus package, a very active domestic investor base and historically low lending rates, as we explored in a deep-dive feature in our hot-off-the-presses Autumn issue.

Here are five key takeaways about the German real estate finance market

Germany has remained a more active real estate market than elsewhere in Europe

Germany was Europe’s largest market in terms of H1 2020 investment, not just buoyed deals but in fact showing growth year-on-year. Savills reported €41.8 billion of investment in Germany, up 32 percent from H1 2019 – in stark contrast to the UK and France, the second- and third-largest markets, which were down 8 percent and 21 percent, respectively.

Meanwhile, Germany accounted for almost a third of the total €1.6 trillion commercial real estate lending in Europe as of 2019, according to S&P Global.

Investor and lender activity in Germany is expected to remain strong in the second half of the year, particularly as a second wave of virus infections threaten other markets in Europe.

German real estate has maintained its stable reputation

Germany’s response to the pandemic proved more effective than other European countries, bolstering its “safe haven” reputation to investors. The country’s strong public finances allowed for a generous €130 billion recovery stimulus package, accounting for a chunky 13 percent of its total GDP, dwarfing the UK’s £30 billion (€33 billion) for instance.

Further, the size, scale and sophistication of Germany’s domestic investor base have also played an important role in the ongoing stability of the country’s property market. More than 85 percent of German deals in 2020 involved a local player, compared with 70 percent in the UK for the same period, according to Real Capital Analytics. The dominance of domestic investors in Germany consequently has limited the impact of travel restrictions and lockdowns on investment.

High lending margins in Germany were short-lived

With a historically low rate environment, the German real estate lending market saw margins tighten during the height of the pandemic, jumping from an average of 131bps to 147bps during the second quarter.

One expert told us he expects a widening in the spread between margins for low-risk trophy assets and opportunistic deals, yet a tightening in the margin spread for residential and top-location office properties.

Covid-19 opened up the German lending market to non-banks

In times of crisis when banks exercise caution, more opportunities can open up for alternative lenders. Debt funds can have slightly more appetite for risk, allowing for flexibility towards LTV levels, attractive pricing and structural capital protection, such as bespoke covenants.

This has proven the case for both German and foreign alternative lenders, including Allianz Real Estate, which secured a $324 million mandate in May from a Bavarian pension fund manager.

But although non-banks fill a niche to an extent, German banks are expected to hold onto the lion’s share of the real estate lending market.

Offices are retaining their appeal in Germany

Although residential and logistics remain the most-favoured property sectors in many markets, one surprise was how well German office properties were holding their own.

Despite concerns about the future of work, Germany was one of the few property markets to see an upswing – rising 10 percent to €12.9 billion – in office sales transaction activity for the first half of this year compared with H1 2019, according to RCA data. Office is therefore one property sector where the country’s lenders expect to remain active.