Editor’s Letter: German lenders motor on

Germany’s Pfandbrief banks are commercial real estate financing machines, propelled by momentum that shows no signs of abating.

Full-year results for 2016 demonstrated that the country’s specialist mortgage banks and those banks with large real estate segments wrote massive volumes of new business. At the largest organisations, volumes were down slightly from 2015, yet still comfortably outperformed post-crisis averages.

Such is the intensity of competition in their market, this lending is done at extreme- ly low margins. German bankers argue that loan pricing cannot possibly creep further down, although there is little evidence that they are being paid any more for their e orts.

What compels them is partly the need to retain clients and maintain their share of the pie in the busy German market.They are also driven by their funding model through the Pfandbrief market, which requires them to continually replenish the pools of assets that act as collateral for their covered bonds.

At a recent real estate finance conference in London, one borrower panellist remarked on the availability of cheap senior debt in several European markets, rhetorically asking: “Just how do Pfandbrief banks make any money?”

To make commercial real estate stack up for them, Germany’s banks are increasingly willing to provide development loans and finance deals outside the country’s major cities. They are also looking to foreign markets to grow their loan books. For lenders vying for core business in countries such as the UK, the Netherlands and France, that means competing against some of Europe’s most competitive lenders.

Joining the fray

Although Germany’s property lending scene remains dominated by its banks, the diverse make-up of the UK sector has been recently highlighted.

Savills held its 29th annual Financing Property event in the City of London in June, during which the consultancy’s valuation gurus present their findings on the UK finance market to a lender audience.

The headline number from the event was that, by Savills’ reckoning, there are 250 organisations open for business in the UK property lending market. Valuation head Ian Mal- den was quick to add that many of those will be lenders on paper rather than frequently active. As the firm flashed onto the screen the lenders it saw as genuinely active, audience members took note.

The bulk of senior lenders are chasing the same type of deals – core properties in prime locations. But an increasing array of organisations are targeting lending opportunities higher up the risk curve. In addition to banks, bor- rowers can turn to insurers, private debt funds, peer-to-peer platforms and challenger lenders, depending on the nature of their requirement.

Property companies, noted Savills, are the latest group to enter the lending market. There is little hard evidence thus far of busi- ness, but the trend is that debt is becoming a more accepted part of property portfolios.