Analysis: Lending in uncharted territory

Real estate lenders at the recent EXPO Real 2017 were positive about the sector’s prospects, but acknowledged the prolonged cycle. 

The continuous hustle and crowded stands at the EXPO Real trade show in Munich in October illustrated the buoyancy of the real estate market following almost a decade of growth.

Despite being held at a site that formerly housed an airport, covering more than 64,000 square meters, the cavernous venue seemed somewhat small for the more than 2,003 exhibitors and 41,500 participants – up 13 percent and 6.1 percent year-on-year, respectively, according to the organisers.

The phenomenal turnout gave Real Estate Capital the opportunity to gauge opinion within the sector, and, overall, the property lenders canvased were positive about its prospects in the short to medium term. However, most noted that they are navigating a the uncharted waters of a ‘new normal’.

“We are in new territory now, with an extended cycle, ongoing low interest rates and seeing that even remarkable events like Brexit have not really had a major fallout in the market,” said Michael Kröger, head of international real estate finance at Helaba.

“I would expect ongoing low interest rates, and stable high-level prices for properties. Real estate will remain attractive, but players will keep an eye on political uncertainty in the EU,” Kröger added.

To a degree, economics overshadowed politics as the hot topic of conversation when it came to macro-matters. However, while bankers at the fair admitted political issues remain a risk, some noted they have simply got used to operating in a climate of volatility. “The big wave of uncertainty seen last year is over,” a German lender said, adding that the focus is now more on economic fundamentals.

Joseph Stiglitz, the Nobel Prize winner and economist who gave the trade show’s keynote speech, said that “ongoing changes in geopolitics and monetary policy will have profound effects on growth and stability”.

With low interest rates having fuelled strong growth in the real estate sector over the past decade, the possibility of a hike in rates was seen as a factor to watch, although a rapid change in direction, at least in Europe, seems unlikely, many argued.

“The current economic recovery in the eurozone will lead to a slow rise in interest rates, but the high levels of debt and the glut of savers stand against a sweeping and rapid change in interest rates,” said professor Clemens Fuest, from the Ifo Institute Center for Economic Studies, a Bavarian university-based economic think tank, at one of the event’s keynote speeches.

Although some reported that banks are creeping up the risk curve in the hunt for higher margins, most insisted that Germany’s real estate bankers remain conservative lenders. Most continue to chase stabilised, low-risk financing opportunities, with competition in the German market showing no signs of abating.

It has become a familiar refrain, but German lenders remain hopeful that senior margins have now reached the bottom. However, most still accept that, for a 50 percent loan-to-value senior loan eligible to be funded through Pfandbriefe, loan margins remain below 100 basis points. “In the senior space, German banks are still underbidding each other and competing on pricing,” a debt advisor said.

To offset low margins, some German lenders are focusing on new initiatives. At the event, Berlin Hyp announced the acquisition of a stake in the financing platform BrickVest, in a move that takes forward the lender’s digitalisation strategy to cut costs and optimise internal processes while diversifying its revenue streams. In future, the bank could provide senior debt financing through the platform.

Another cost-saving option highlighted at the fair was the use of drones for due diligence of properties around the world, something that Allianz Real Estate is already doing through its partnership with the start-up FairFleet.

The hunt for lending opportunities outside Germany was also heavily discussed at the fair. German insurer Allianz noted its drive to move away from local lending, which has seen it provide €5.9 billion across seven European countries. “Our next step in mind is to provide debt in central Europe, particularly in Austria, the Czech Republic and Poland,” said Roland Fuchs, the insurer’s head of European finance.

Aareal Bank, which has boosted its margins following a continued push into higher-paying markets such as North America, is determined to diversify its loan portfolio globally. “The more diversified geographical footprint, the better,” said Christof Winkelmann, a member of Aareal’s management board, adding that Australia could be its next potential market.

Research released by Colliers International to coincide with the event, demonstrated that London remains the dominant destination for capital, boosted by Asian money, followed by Paris. However, German cities such as Berlin and Frankfurt posted increased investment volumes.

The German market remains a safe haven for property investors on the back of its stable economic and political climate, comparison with uncertainty in other European countries.

“Germany is seen as a stable country. There’s strong demand for real estate assets in Germany, and this is expected to continue. Margins are competitive, but deal activity is intense, which benefits lenders,” said Patrick Walcher, LBBW’s head of real estate customers, global investors, open funds and Great Britain.

A major debt advisor said Germany’s institutional investors are very active in the country, although their deals often get financed through equity by major insurance companies or open-ended funds – which means fewer opportunities to lend. However, a German lender noted that these equity-funded transactions often involve post-deal debt packages.

Debt liquidity is strong, market players said, particularly for core properties backed by prominent sponsors. At the same time, Germany, like Europe’s other core markets, is peppered with a handful of mega-deals. Oxford Properties’ €1.1 billion purchase of Berlin’s Sony Centre was one transaction that attracted plenty of buzz at EXPO. The deal is thought to involve debt financing of around €600 million, provided by German banks with the ability to write large tickets to then carry out syndications.

Another major talking point at the event was the growing interest in logistics assets. “Investing in logistics seems to be more a focus for investors. There are more transactions and a higher frequency of deals. There is a trend to look at logistics assets in last-mile locations in particular,” said Assem El Alami of Berlin Hyp.

Overall, the fair showed that lenders are confident amid the ongoing bonanza of the real estate sector. This phase, however, has already been prolonged and players remain vigilant, trying to anticipate the next stage in the cycle.