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German banks strike a cautious note

Full-year 2017 results show mixed fortunes for Germany’s real estate lenders and most expect a challenging year ahead.

Germany’s real estate lending banks have concerns about strong competition in their domestic market with some expecting a dip in lending volumes in 2018, according to the latest round of results.

Despite record investment volumes in Germany last year, up 8.4 percent year-on-year to €57 billion according to CBRE, the country’s largest two property lenders by volume – Helaba and Aareal Bank – reported lower levels of new business.

High amounts of equity in the market have been cited as fuelling lender competition for debt mandates, contributing to margins being kept at Europe’s lowest levels – recently reported far below 100 basis points on loans reflecting 60 percent loan-to-value.

Most German banks surveyed in consultancy JLL’s German Real Estate Finance Index last October expected the “subdued” financing environment to continue, with equity capital and foreign debt filling gaps in financing by domestic lenders.

“2018 will be no less challenging than 2017,” Andreas Arndt, chairman of the management board at pbb Deutsche Pfandbriefbank said at the bank’s annual press conference in March.

“Taking into consideration the continuous increase in supervisory action … the competition and the boom in the commercial real estate sector – and the associated risks – our approach remains deliberately conservative.”

The bank has adopted a “decidedly cautious outlook for 2018”, he added, forecasting new real estate lending in the range of €10 billion to €11 billion, down moderately from the €11.6 billion last year. However, unlike some of its rivals, pbb’s 2017 volumes increased by 10.5 percent from 2016.

Germany accounted for most new business, at 49 percent. However, expansion into new markets drove new lending growth, particularly in the US, where the bank increased its share to 8 percent by the end of 2017 after only 18 months operating in the market.

Berlin Hyp also increased its lending activity, with €6.7 billion of new lending completed in 2017, a 24 percent increase on the same period a year earlier.

As with pbb, growth was driven by new business in foreign markets, which reached €2.2 billion last year, compared with €1.2 billion in 2016. Although Germany accounted for two-thirds of its new lending last year, the bank’s financing of foreign properties accounted for 33 percent, up from 22.6 percent in 2016. Poland and the Benelux – at 12 percent and 11 percent of new lending, respectively – were growth areas. France and the Czech Republic accounted for 6 percent and 4 percent, respectively.

Despite growing its volumes, the bank hinted at a challenging financing market in 2018, characterised by “fierce competition”. New business volumes for the coming year will be “down considerably from the very good level seen in 2017”, as the bank adheres to its “restrictive” risk policy, Berlin Hyp said in its latest financial report.

“In order to enhance flexibility in terms of management and to leverage additional earnings potential, the bank plans to further intensify the syndication business,” it added.

Another German bank planning to expand syndication activities to “fine-tune” the management of its own assets and liabilities is Helaba, which saw last year’s new business fall 16.3 percent to €8.7 billion.

Aareal posted a 4.3 percent decrease in new lending to €8.8 billion in 2017, albeit above the high end of its 2017 expectations, with newly-acquired business up by 12 percent year-on-year. Looking at 2018, the bank is expecting to lend between €7 billion and €8 billion, reflecting a more conservative outlook that for 2017.

The bank also emphasised geographic diversification as a strategy to offset market challenges. Since 2016, Aareal has aimed to capture more business in the US, to benefit from higher margins than those found in its home market. Aareal’s share of new business increased to 34.8 percent in 2017, from 24.6 in the previous year.

“While margins were under pressure in most European markets and the US in 2017, they remained on a higher level in the US when compared to Europe,” the bank said in its annual report.

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