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Growth rate for German CRE lending drops due to flood of equity

A flood of equity into the highly-priced core German real estate market has reduced borrower demand for credit.

The growth rate in new German commercial property finance business halved during 2016 to 10 percent and is set to decrease to 5 percent this year, the latest German Debt Project report has shown.

A flood of equity into the highly-priced core German real estate market has reduced borrower demand for credit, according to the report, which is compiled by the International Real Estate Business School at Bavaria’s University of Regensburg.

The increase in equity has been so significant that, even with rising competitive pressure, the CRE market has seen a drop in outgoing borrowed capital. Increased equity funding has put pressure on loan-to-value ratios, which decreased by two percentage points last year from 68 percent in 2015.

Margins remain under pressure on the back of sustained domestic competition by German real estate lenders in the core business. Lending margins in new business are still “extremely hard fought,” the report notes. Net margins across the report’s sample are moving towards an average of 100 basis points in 2017, down from 108 bps in 2016 and far from the 134 bps mark in 2013.

Faced with “sharp falls” in margins, the lending institutions surveyed are determined to keep their existing finance portfolios high to preserve their earning capacity. In 2016, the portfolio rose by almost 6 percent, similar to the previous year.

Institutions’ risk assessments have led to a more cautious approach to financing retail real estate, while sentiment for logistics and hotels is “more optimistic”, with development projects facing an improved assessment for finance.

Taking results from its sample of lenders and extrapolating them across the wider German property market, the authors said that new business for development projects increased to 26 percent last year, from 23 percent in 2015.

New business for other commercial real estate finance increased marginally to 19.9 percent in 2016, from 19.5 percent in the previous year. The share of the new business portfolio accounted for by non-A-cities virtually stagnated in 2016.

Some banks had been intent on looking for business outside the country, although this was thwarted to a degree by the uncertainty created by the UK’s vote to leave the European Union.

“German real estate lenders are still active in the UK, but post-Brexit, overall real estate investment volumes are down by around 40 percent from their peak at the end of 2015,” said Simon Mallinson, from Real Capital Analytics, a backer of the report.