German margins could fall to 109bps in 2016

German commercial real estate lending margins could come in by 10 basis points during 2016 to as low as 109 bps by the end of 2016, a poll of lenders in the country has predicted.

Such a decrease would bring margins to below 2010 levels, according to The German Debt Project 2015 report, which was compiled by the International Business School at the University of Regensburg.

The report, the third annual study of CRE lending in Germany by the university, was presented in London on Friday (4 December) at an event hosted by the Commercial Real Estate Finance Council (CREFC) Europe. The report was based on the results of a data questionnaire and separate interviews with German lenders conducted during the summer and provided commentary on 2014 performance and predictions for 2015 and 2016.

Twelve lenders with a total loan book of €123 billion were polled, with an additional 12 institutions representing around €80 billion also taking part in interviews. Fitch also provided analysis of €9 billion of CMBS.

“Immensely high” competitive pressure forced margins for new business down by 4.4 bps across the sample to 129.2 bps by the end of 2014. Respondents predicted that margins would hit 119.2 bps by the end of 2015, a reduction of 10 bps during the year.

However, the report showed that the erosion in margins was much more modest than predictions from the previous year’s study, when lenders expected a drop to 114 bps during 2014.

Loan-to-value ratios increased during 2014. For new business, LTVs were up 1.7 percent to 67.8 percent, and across the total loan book were up 0.2 percent to 66.7 percent. For development finance, LTVs increased very slightly to 73.9 percent.

LTV across the sample is expected to stand at 69.8 percent by the end of 2015, staying stable into 2016.

The report surmised that a greater number of borrowers are seeking low LTVs and attractive margins because they are seeking to buy investments for their high liquidity and are finding it difficult to find adequately investible core assets.

Growth in new business during 2014 was 9 percent, which was actually down from double digit growth in the previous two years. New business in CRE grew from €68 billion in 2013 to €72.2 billion in 2014, up 6.3 percent. However, institutionally-held residential new business was up from €37.4 billion to €43.8 billion between the two years, a 16.9 percent jump.

Growth for 2015 was predicted to be around 9 percent, in line with 2014’s total.

There was only a modest rise in the volume of the total loan book of 1.9 percent from €426.3 billion to €434.4 billion, compared to an expectation of 2.6 percent. The modest rise is partially explained by the fact that high growth in new business was needed to keep loan books at a steady level due to the maturity profile of the overall debt pile.

The research noted that the appetite for financing the higher-margin business of project development is high. New business for development finance was up 12.9 percent between 2013 and 2014 to €26.7 billion, of which €12 billion was commercial development finance and €14.7 billion was residential development finance.

By sector, new lending to retail properties was down 7.1 percent, while office investment financing was up 2.3 percent. New business in other commercial sectors grew by 38.6 percent year-on-year, with logistics and hotels performing strongly.

Within Germany, the shift away from the seven key cities did not continue during 2014. The share of the loan book relating to loans in Germany’s top tier cities rose from 55 percent to 66 percent, with Berlin and Munich dominating.

The research noted an increasing trend for German banks writing loans outside the country, with foreign loan pledges up 16 percent in 2014 and expected to be sustained this year. German lenders face the dilemma of whether to turn their attention to smaller domestic cities, which tend to be also served by regional banks, Sparkassen and Volksbanken, or to foreign cities such as London.