Lenders’ guide to Europe, part 3: Germany is a squeeze for lenders

In the third of our four-part examination of Europe's lending opportunities, the German, Central and Eastern European and Nordic markets are under the microscope.


Europe’s most heavily banked property market is difficult to crack, but there are areas of opportunity, writes Lauren Parr


As Europe’s ‘safe haven’ with an ultra-competitive banking sector and strong economic growth, Germany can be difficult for new entrants to break into.

Senior lending is dominated by Pfandbrief lenders, which fund themselves through the low-coupon covered bond market. Pan-European debt funds may, however, see an opportunity in the provision of mezzanine finance for development schemes. Against a strong economic backdrop, the market is thriving, with growth in construction in ‘B’ and ‘C’ locations in the residential, office, retail and hotel sectors.

“Especially mid-cap developers have become more educated around mezzanine tranches as a piece of the capital stack,” says Curth Flatow, founder of German debt brokerage firm FAP Finance. The debt is priced at between 8 percent and 14 percent, with tranches ranging from €5 million to €15 million.

There is also demand for mezzanine where banks might only be prepared to offer leverage of 55 percent to 60 percent, on value-add or transitional properties. For banks with low costs of capital and the ability to write large cheques, Germany’s core sectors offer stable investments. Logistics has been a hot spot, with rising ecommerce trade boosting user demand. In 2017, around €8.7 billion was invested in Germany’s logistics properties – roughly 15 percent of all transaction volumes, according to JLL.


Such is the competition in the banking market, margins far below 100 basis points at 60 percent LTV are reported. “New regulation could make things more interesting, but for now competition is tough,” says Bryan McDonnell, head of European senior debt origination at PGIM Real Estate Finance.

There are also barriers to entry. “While the UK market is dominated by London, in Germany you need to be able to understand lots of different cities,” says Jim Blakemore, partner at GreenOak Real Estate, whose team includes four German-speakers. “If you’re going into ‘B’ and ‘C’ locations, especially if you’re doing residential, you need to have an appropriate business plan in relation to how a product will be managed. This means a unique lease concept despite any demographic numbers,” says Flatow.


Almost half the record €56.8 billion of commercial property transactions last year were executed by foreign investors, according to JLL. Larger international asset managers are doing value-add or opportunistic deals while, in addition to traditional capital sources from the US and UK, Asian investors have expanded their activities and now account for 10 percent.


While Pfandbrief banks dominate, there is also growing demand for real estate debt from German institutional investors such as the country’s third largest insurer, Talanx. Allianz lends in the core segment at longer loan durations than traditional banks.

There are few debt funds focused solely on German real estate. Pan-European funds including DRC Capital and Cheyne have done deals, while Germany-based managers Caerus and RiverRock are also active. Corestate with HFS acquired its own mezzanine platform in Germany last year.



Despite growing populism in some key countries, real estate financiers have faith in Central and Eastern Europe’s maturing markets, writes Alicia Villegas


Financing mandates in the Central and Eastern European region are typically found in the main markets of Poland, the Czech Republic and Hungary, which traditionally attract the largest investment flows.

With generally higher margins than in Western Europe, German and Austrian lenders usually back prime income-producing properties in the region, mostly from the office and retail segment, although more recently from logistics. Senior margins for income-generating assets are understood to range from 160 to 180 basis points in the Czech Republic, 180bps to 210bps in Poland and 250bps to 270bps in Hungary, according to sources.

Local banks are more focused on development finance, with a 50bps to 75bps premium over prime income-producing assets in Poland and the Czech Republic and a 100bps to 150bps premium in Hungary.

An emerging opportunity is student housing development. “Quite a lot of developers are looking at it and the existing projects are doing very well. Banks will definitely look to finance this soon,” says Piotr Piasecki, head of corporate finance, CEE at JLL. “These financings should provide around 50bps to 60bps over investment margin.”


The economic nationalism embraced by Hungary’s Fidesz government, followed by the Law and Justice government in Poland, is considered by many in the industry as a destabilising factor for the countries’ real estate market.

In Poland, for instance, the policies of its populist government – which slapped domestic lenders with a Banking Tax Act and approved a ban on Sunday trading – prompted the country’s central bank to voice concerns about financial stability.

Despite investors’ concerns, investment flows remain strong in the region, which attracted circa €13 billion in 2017, up 3.3 percent year-on-year, according to JLL. However, some markets are small, with limited liquidity.


In recent years, a shift in the sources of investment capital has been evident, according to Colliers International research.

Investors come from a wide range of countries. Last year, for instance, South African fund Rockcastle was Poland’s top property investor, with €1.5 billion of invested capital by H1 2017 according to JLL. It continued its drive to invest in the country with the acquisition of the Alfa shopping centre in Bialystok for €92.3 million.

Preliminary data from Colliers for Q1 2017 suggest continued significant local investor activity in Hungary and the Czech Republic and the entry of Thai investors into the Czech Republic and Poland.


Regional banks, such as Bank Pekao in Poland, CSOB in the Czech Republic and OPT Bank in Hungary, are active property lenders in the region. German banks, predominately pbb Deutsche Pfandbriefbank and Helaba, and Austrian banks including Erste and Raiffeisen, are also crucial lenders, mainly in Poland, the Czech Republic and Hungary.

In Poland, and the wider CEE region, banks have traditionally been interested in granting loans for acquisition or refinancing of new or recently completed commercial buildings in prime locations, let to well-known tenants under relatively long average-term leases.

“Despite opportunities to charge much higher margins, banks were [last year] less interested in ageing or underperforming commercial properties, especially when buyers were investment funds operating on a small scale,” says Mira Kantor-Pikus, head of equity, debt and structured finance, capital markets at Cushman & Wakefield Poland.



Traditionally served by local banks, the region is attracting lenders from outside the area, writes Lauren Parr


Regional banks including Nordea, Danske and SEB typically finance property transactions in the Nordic markets, although observers say they are relatively conservative lenders, less prepared to compete aggressively on pricing and leverage than banks in some other European markets.

An increasing amount of cross-border capital has been targeting Denmark, Finland, Norway and Sweden in the past few years. Domestic investors seeking smaller tickets against core property are financed by local banks, while international private equity money looking cross-region often requires financing from international lenders.

“The local investor base is fragmented across markets, which means if you buy a multi-jurisdictional portfolio it’s difficult to get transparency from both an investment and debt perspective,” says Robert-Jan Peters, deputy head of CBRE’s EMEA debt and structured finance team.

Prime loan margins are generally higher than the Dutch and German markets. “Something at 100 to 120 basis points in those markets could be 30bps to 40bps wider in the Nordics, down to not having such a competitive market,” says Peters.

Slightly better returns, combined with the stability investors can expect from the Nordic countries, makes it an attractive lending prospect.

“Our interest is around longer-duration loans. Local banks tend to stop at around five years; if you’re willing to go to 10 you can achieve a premium of 20bps to 30bps,” says Andrea Vanni, head of European real estate debt investments for Deutsche Asset Management.

The logistics sector, meanwhile, is gaining a lot of traction in such wealthy economies, presenting a value-add investment opportunity for international money. Germany’s Pbb Deutsche Pfandbriefbank provided a SKr410 million (€41 million) loan for locally listed Logistea as well as a SKr985 million loan for Braviken Logistik, secured against three properties last year.


The individual country markets are relatively small, which means there could be a lack of liquidity for certain assets at some point in time. “Therefore, the location and quality of an asset is paramount,” says Vanni.

With entrenched local lenders, it can be difficult to win business from banks’ relationship clients. The Danish market is dominated by a covered bond market called RealKredit, which provides competitive funding, while life insurers represent a deep source of long-dated finance in Norway.

Most debt funds have limitations with regard to non-sterling denominated loans, which means they need to hedge their exposure – making it more complex to lend in most Nordic markets.


Local pension funds and housing associations are typical sponsors, although private equity firms have also been active. Blackstone bought a large chunk of Finland’s property with its purchase of the Sponda platform. last June.


The markets have a relatively low level of penetration from international lenders. Pfandbrief banks, including pbb Deutsche Pfandbriefbank and Helaba, have been active, while investment banks and some debt funds are able to lend in the region.

Southern Europe will follow on 2 March.