German real estate lender sentiment is ‘bleak’, research reveals

Specialist real estate adviser BF.direkt has reported worsening sentiment among German real estate debt providers, after research it conducted during the fourth quarter showed it had hit a record low.

The Stuttgart-based firm said on Monday that tighter financing conditions prompted its latest BF.Quartalsbarometer survey of over 100 commercial real estate lenders to drop from -16.91 points during the third quarter to -18.21 points. 

The latest score marks another all-time low for the survey, which tracks the business climate among real estate lenders in Germany, with sentiment having already hit a record low in the previous quarter. 

Respondents said that the rising cost of debt was causing difficulties both for real estate investors and for lenders, with many emphasising that borrowers were being impacted by a negative leverage effect and the need for higher equity ratios. 

Several interviewees argued that the circle of buyers has contracted as a result, with one respondent observing that “capital expenditures on portfolio property… can no longer be financed from a property’s cashflow while still having to cover the loan servicing costs”. 

Other respondents emphasised that the need to maintain loan servicing capacity had become “a challenge”.

Glum sentiment

Francesco Fedele, chief executive of BF.direkt, said: “In everyday business, we are also confronted with the glum sentiment when talking to lenders. Without doubt, it will take a few more quarters before the situation returns back to normal, relatively speaking.”

Analytics firm bulwiengesa, which conducted the research, said it painted a “bleak” picture of the financing market, with around 70 percent of the respondents stating that new lending had kept decreasing or started to decrease.

The research also showed that margins in development financing and standing investments continued to rise. 

For development finance, BF.direkt reported a four basis point rise, to 295bps during Q4 2022, from 243bps during the same quarter of last year. The survey also identified that a “modest” 1.4 percentage point increase in loan-to-cost ratios to 68.5 percent had done “little to change” the fact that LTC had been falling for the past few quarters. 

Steffen Sebastian, tenured chair of real estate finance at the International Real Estate Business School and academic adviser of the report, said: “Lenders are also pricing the risk they perceive into the margins. It is higher today than it was a year ago. With that in mind, the rise in margins is plausible and rational.”

However, Sebastian added he did not foresee a dramatic decline in real estate values: “As far as I can see, there will be no slump in prices. If we had a real estate bubble on our hands, we would have felt it by now. 

“In the longer term, prices will soften in many segments, but they will not collapse. We need to remember that an inflation rate of ten percent already implies a price drop by ten percent in real money terms, assuming that nominal prices remain stable. This in turn dampens the downside potential,” he said.