German lender margins at highest level in over a decade

Margins issued by German lenders have reached their highest level in over a decade while loan issuance has “flatlined”, real estate adviser BF.direkt reported following research it conducted during the second quarter.

The Stuttgart-based firm said on Wednesday the average margin for portfolio financing is now, on average, 245.1 basis points, increasing from 235.1 basis points during the last quarter. The average margin for development is 342.3 basis points, up from 337.1 basis points during Q1 2023. These figures are the highest since the survey launched in Q4 2012, BF.direkt said.

The survey, which tested the sentiment and business outlook of 110 real estate lenders in Germany, found three out of four said the current financing situation is “more restrictive” since the first quarter.

The majority of respondents, BF.direkt said, reported a flatlining in new lending overall but there has been a stark decline in the number of lenders willing to lend to certain types of assets. The share of financial institutes prepared to finance office development dropped from 81.5 percent to 56.8 percent between the first and second quarter.

The willingness to finance also declined for other use classes such as logistics, retail, social real estate, micro-apartments and multi-storey car parks, the report said. Only hotel development registered an increase in appetite – 22.7 percent of lenders reporting openness to lend, up 7.4 percent from Q1.

Loan-to-value and loan-to-cost ratios, however, remained stable at 69.3 percent and 65.3 percent respectively and it was the first time in six quarters a lender had issued finance of over €100 million.

Francesco Fedele, chief executive of BF.direkt, said its assessment of the findings showed real estate lender sentiment was “finding a stable basis”. But he added: “The question is how long the situation will last.”

Credit risks

The tightening of credit conditions in Europe, alongside the rising cost of capital and declining property values is increasing risks for real estate companies’ credit quality in the next 12-18 months, according to a note issued by credit ratings agency Moody’s on Thursday.

Weak operating conditions will make it difficult for companies’ to offset increases in higher funding costs, Moody’s predicted.

Predicting rental income growth of between 1 and 3 percent between now and 2025, the company said: “[This] typically reflects a stable outlook. But rental growth will not be sufficient to offset the negative impact on higher interest rates on the sector, which relies heavily on external capital access and transaction markets.”

REITs and real estate operating companies are attempting to reduce costs and cut capital spending in a tough trading environment, with 22 percent of such companies in Europe announcing changes to dividend payments in recent months, Moody’s data shows. Only 12 percent have raised equity as companies shy away from diluting shareholders when they are trading at material discounts to their net tangible assets, the note added.

This subdued investment market is limiting companies’ ability to de-lever balance sheets. Sweden’s SBB said on Monday that it is considering a sale of the company as it battles to reduce its debts. The residential and social infrastructure company has been working to refinance SKr10 billion (€879 million) of bond debt that matures in the next two years. But in recent weeks it has been taking steps to reinforce its financial position by stopping dividends and shelving a planned rights issue.