German senior loans ‘to increase in attractiveness’

Amid continuing low interest rates, ease of availability and low return requirements, senior loans in Germany are tipped to “increase in attractiveness in the future” according to the EY Real Estate Capital Radar Germany 2016 report.

Amid continuing low interest rates, ease of availability and low return requirements, senior loans in Germany are tipped to “increase in attractiveness in the future” according to the EY Real Estate Capital Radar Germany 2016 report.

The report found that senior and junior loans in the country have a “very high availability” with expected returns ranging from 0.5 percent to 4.5 percent. The return requirement for mezzanine stands at an average of 9.5 percent.

The relative availability of private debt is currently higher than for other financing instruments such as private equity, public equity and public debt. In 2015, private debt volume in Germany stood at around €80 billion. Going forward, a tendency for higher risk tolerance is anticipated, along with increasing loans-to-value (LTVs).

Among other key findings, a moderate interest rate turnaround is expected in 2016 with an increase of up to 50 basis points predicted by 80 percent of respondents – and only 20 percent expecting a fall of up to 50 basis points. Last year, for the first time in its history, the three-month EURIBOR interest rate went negative (-0.131 percent at the end of the year).

The report also found that the influx of refugees into Germany is expected to be a positive accelerator for the financing market. This accords with a view expressed at REC’s recent Germany Forum 2016, where numerous panellists said demand from refugees would help drive the residential sector.

Asked about the likely impact of the refugee crisis on Germany’s real estate financing market, 75 percent of respondents said it would be either ‘neutral’ or ‘rather positive’.

While the office, retail and residential sectors remain the “big three” in terms of capital availability, shopping centres is the sector with the fourth-highest capital availability – indicating the growing strength of Germany’s retail sector. Willingness to finance operator-run assets is generally low, with the exception of hotels.

Respondents to the survey totalled 151, accounting for around one-third of Germany’s commercial real estate financing volume. Almost half (46 percent) were banks, followed by funds (17 percent), pension funds/assurance (14 percent), family offices (11 percent) and others (12 percent).

Only around 50 percent of the respondents said they provided financing outside of Germany – with the bulk of outside finance going to other European countries, followed by North America.