OPPORTUNITIES IN GERMANY
Thaw in source of lenders’ funding spurs return of low-cost property debt, reports Jane Roberts
Cheap debt is plentiful again in Germany and is helping to lubricate new deals and refinance some very big tickets.
Sources of capital, both debt and equity, “have restructured”, says Marcus Lemli, head of Savills in Germany. “The market seems more sorted than 18 months to two years ago, when one question was: ‘where’s the debt going to come from?’”
New players have arrived; insurers such as Allianz and AXA, which are originating loans and taking participations, plus a few debt funds investing in mezzanine and whole loans, or senior debt, managed by the likes of M&G Investments, iii and LaSalle.
But the biggest development is that more German banks are lending again. Bernhard Scholz, pbb Deutsche Pfandbriefbank’s board member responsible for real estate finance, says: “Some German banks, particularly the landesbanks, have returned, stronger, after restructuring and they are becoming more active.”
Like domestic institutions, German banks are most focused on their home market, says Henderson’s European research director Stefan Wundrak. “German lenders used to be active across Europe. Now they might do a bit of lending in France and the UK but have mainly retreated to their domestic market.”
Debt is also less restricted now compared to late 2011/early 2012 because banks’ funding markets have improved as renewed fears of a Eurozone break-up have eased.
Pbb, which does about half of its property lending outside Germany, lent €2.8bn on real estate in the first half of 2013, up from €1.2bn in the first half of 2012. Its press release for its full-year 2012 figures stated: “At the start of 2012, pbb adopted a cautious stance in its origination activities, given the prevailing uncertainty on funding markets.”
Scholz says this uncertainty about the bank’s own funding sources “slowed us down. At the end of 2011 there was a tightening of wholesale capital markets. When markets re-opened and were fully-functioning, we started originating again.”
So far this year, the bank has raised €6bn, in six benchmark issues, four of them mortgage pfandbrief, one public sector pfandbrief and one senior unsecured bond. The latest pfandbrief issue, last month, raised €500m of five-year money at 9bps over mid-swaps, paying a 1.375% coupon.
The capital markets recovery extended this year to CMBS, which re-opened in robust fashion to refinance several blockbuster German multi-family housing loans. GAGFAH has refinanced €3bn of maturing loans via the €1.07bn Taurus 2013 GMF1 and €2bn German Residential Funding 2013-1.
“The refinancing that came to the market in 2012-2013 looked demanding and more’s coming in 2014, so it was encouraging that everything went quite smoothly,” Scholz says.
Pbb is an active residential lender, providing €3.1bn in the past two and a half years. Nearly half of its 2013 German real estate lending has been on residential, Scholz says, pushing pbb’s overall loan-to-value- ratio on all new property lending to 63%.
“Doing more German resi raises the LTV, as resi LTVs are slightly higher, in the high 60s% to near 70%. But we haven’t changed our risk parameters or the mix of lending on fully stabilised versus to-be-stabilised property. In Germany we continue to do residential
construction; other development is done on a very cautious, selective basis.”
Gross lending margins in Germany are “under pressure and slightly down”; bad news for pbb, which needs to improve profitability ahead of re-privatisation in 2015, or other lenders in Germany’s competitive market.
However, Scholz says: “We are replacing low-margin business with higher-margin business, are benefiting from lower funding spreads and reducing our cost base. These factors will improve our profitability.”
Lending survey will take a German market snapshot
The first European survey to shine a light on property lending trends outside the UK will be published next month.
The around 100-page report will cover Germany’s lending market and has managed to get responses from domestic and international banks and insurance companies representing about 50% of the country’s lending market by volume, or between 20 and 30 respondents.
It will include a breakdown of Germany’s lending market by region and asset classes, as well as an analysis of major trends. It will look at how these factors might influence market performance for the 2013 full year and next year. There will also be commentary on funding gaps, the distressed asset market, CMBS and the impact of issues such as regulation and increasing competition.
Carried out by Regensburg University’s International Real Estate Business School (IREBS), its working title is the IREBS German Debt Project. IREBS is supported by sponsors Real Capital Analytics, BulwienGesa, DTZ, Jones Lang LaSalle and Savills. Verband Deutscher Pfandbriefbanken, the association of German mortgage banks, lent its support and encouraged banks to participate in the interest of introducing some transparency to corporate real estate lending.
IREBS’ and the sponsors’ original plan to produce a pan-European survey was shelved in favour of a more feasible country-by-country approach. The plan is to repeat the German report annually at the very least.
Bill Maxted of De Montfort University, who with Trudi Porter produces the only comprehensive report on European lending every year focused on the UK, is an adviser on the IREBS project. As in the De Montfort study, organisation-level data will be confidential and the sponsors and report subscribers will see aggregated data.