This article is sponsored by Helaba
Frankfurt-based bank Helaba is among Germany’s largest real estate lenders. In 2019, it provided €10 billion of new property finance, up 2 percent on 2018, including €4.6 billion in its domestic market.
However, covid-19 has brought challenges to Germany’s real estate sector. Speaking to Real Estate Capital in early August, amid increased talk of a potential second German lockdown, Helaba’s head of real estate finance, Jan Peter Annecke, discussed his outlook on the bank’s home market.
How has covid-19 affected Germany’s real estate sector?
We are observing a significant slowdown in investment and rental activity. We also see clear signs of a slowdown on the financing side. At the beginning of the lockdown, there were bottlenecks in longer-term funding on the money markets for weeks.
As a result, many banks temporarily stopped new business or reduced it, leading to a shortage of supply of real estate finance. Those that continued to lend were able to raise their margins. The situation in the money markets has eased but funding costs remain higher than pre-covid.
How has Helaba’s real estate lending business been affected?
We are well financed, so we did not stop new business. However, the concern that funding opportunities could disappear from one day to the next brought back memories of the 2007-08 financial crisis. Since covid-19 is far from over, we believe money market bottlenecks can always occur. For this reason, in the peak phase of the lockdown, we focused on the financing requirements of our relationship customers. In individual cases, however, we also generated new business with target clients. Since then, our financing activities with absolute new customers have returned to normal.
“The market is narrowing due to a flight to safety”
The short era of high margins is already over. However, they remain higher than pre-covid. While core product is already experiencing intense margin competition again, riskier assets still have significant margin premiums.
Although we have not adjusted our risk strategy, we are responding to covid-19. In each potential deal, we carry out a coronavirus analysis of the property, which is updated until deal closing. This naturally results in adjustments to the structure of the loan.
As a direct result of the lockdown, loan-to-values in the market have fallen 10-20 percent, but the LTV trend is rising again.
How competitive is the German property financing market now?
During lockdown, competition declined significantly. But it has increased since. Only a few banks have substantially revised their new business targets for 2020, leaving only a few months to achieve ambitious targets.
However, with investment activity reduced due to coronavirus uncertainty and less crossborder investment, supply of finance exceeds demand. In addition, the market is narrowing for investors and lenders due to a flight to quality or a flight to safety. All parties are concentrating on a rather small segment of the market.
How do you feel about the market’s prospects?
The flight to quality reaction will make Germany a sought-after location for investors and lenders. There is already a large and stable domestic investor base. A functioning healthcare system and a stable legal system make Germany a safe haven in the eyes of many international investors. So, I expect real estate prices to remain stable.
Which sectors do you feel most confident about?
Demand for living space remains high, so residential is valued because of its resistance to the crisis. However, the crisis has also shown that certain retail properties have surprisingly performed very well, namely retail parks and local supply centres. Supply-related logistics have also attracted a lot of interest.
We are surprised at how well office properties are holding their own. We expected the positive experience of working from home to lead to a rethink of space requirements, and for tenants to be very cautious due to the increased risk of insolvency. We did see an element of that but we have also seen many new leases signed at, or above, pre-covid rents. Measured against our expectations, this was remarkable.
I doubt we will see a broad trend towards home working in the medium term. Short-term, we see slightly rising vacancy in A-cities, which might even be healthy in places like Berlin or Munich.
What surprises me is the growing investment in B and C cities, most likely driven by pressure from investors. I doubt whether vacancy rates and rent levels will support high purchase prices in B and C cities in the long term.
Which types of property are you most cautious about?
Shopping centres, department stores and high street retail are most affected by the crisis, as well as hotels. Coronavirus is accelerating the shift from physical to online retail. There was a significant catch-up in retail sales in the weeks following lockdown but they will not offset the sales declines.
How does the crisis affect your approach to development finance?
We see that development continues to be financed. There have been hardly any construction site closures or supply problems in Germany. We also continue to be active in development finance.
However, in recent years, independent of covid-19, we have reduced the proportion of development finance within new business. But we will not reduce it further because of covid-19. It is more difficult for developers to obtain finance, but projects with a secured exit or significant pre-lets do not face major restrictions.
Will covid-19 affect Helaba’s appetite for real estate financing?
Helaba is and will remain an important real estate lender. Our expertise means we can respond appropriately to crises. But, of course, there will be adjustments to the way, what and where we finance. In my opinion it is this differentiated response that makes up the professionalism of a real estate lender.
What are the biggest challenges facing Germany’s real estate market?
I expect more investor and lender activity in H2. Investors have lots of liquidity and lenders are reluctant to lower their 2020 new business targets. This may lead to an increase in already high prices. There is a risk that the unhealthy competition on terms and conditions on the financing side will intensify again. To what extent that will result in capital reallocations to worse locations or worse properties, I cannot assess at present. But I do not think this would be sufficient to offset the value adjustments expected due to a period of prolonged weak economic activity. Rating effects, among other things, could then have a negative impact on the risk-weighted assets of banks.