Rising confidence lifts LTV levels as Germany recovers

IREBS lending report suggests LTV levels will hit 72% next year, reports David Hatcher.

Margins for German property loans will fall and loan-to-value ratios will rise this year and next, according to  the second annual German commercial real estate lending survey by the International Real Estate Business School (IREBS).

Across the 32 banks surveyed, with real estate books totalling €229bn or 50% of the market, margins on new business actually edged up by seven basis points last year, to 127bps. LTV ratios were almost unchanged on 2012, down 0.4 percentage points to 66.3% during 2013 (see fig 1).

REC 10.14 p14 Chart 1

However, the banks predicted that average LTV levels will rise to 69.5% by the end of this year, while average margins will fall to 114bps. The trend is expected to continue into 2015, with LTV levels hitting 72.1% and average margins down to 104bps.

This is one of the strongest indicators yet of lenders’ renewed competitiveness, as they deal with their problem debt and return to German real estate lending.

“There has been a strong increase in competition from banks seeing a booming German real estate market that is relatively attractive compared to other sectors with lower growth, as well as from international players,” says Markus Hesse, senior consultant at IREBS, which aims to replicate the UK’s De Montfort University lending report.

“Some have ‘cleaned up the house’ in terms of problems and are lending again. If they all want to do new business with the same customers then this dynamic will inevitably happen.”

The size of the banks’ real estate loan books rose only 0.8%, but this followed falls of 2.4% and 0.7% respectively in 2011 and 2012. A 2.6% rise is forecast for 2014, with a further 3.4% increase in 2015.

REC 10.14 p14 Chart 2There is a split between banks that are increasing their books and those still focused on selling problem loans (see fig 2), with 31.3% of banks weighed down with past problems cutting their loan books by over 5%, while 37.3% had expanded their real estate book by more than 5%.

New lending volumes continued to rise in 2013, by 11.3%, albeit at a less rapid rate than the two previous years. More banks were also willing to write larger cheques:  17.3% would provide more than €100m on a single deal, up from 12.3% in 2012.

Desire for increased yield and value has seen investors seeking opportunities beyond the seven largest ‘A cities’. New lending in core locations fell 5.4%, a huge switch from the 28.8% rise the previous year (see fig 3), while outside the top cities, it rose 10.8%, following a 20% rise in 2012.

One surprise was a large fall in new development lending, by 8.3%, following two years of REC 10.14 p14 Chart 3successive rises. Banks’ overall development finance exposure fell only 0.9%, suggesting that some banks may be struggling to get problem development debt off their books.

The survey also shows that collaboration between bank and non-bank lenders is building, with 41.7% of respondent banks having clubbed with insurance companies and 29.2% with debt funds. ■