Germany’s commercial real estate market is fiercely competitive and oversupplied with debt.
Panellists at Real Estate Capital’s Germany 2015 Forum, held in Frankfurt this week, highlighted the “very low” margins obtainable and weight of capital that has pushed yields down.
“For bank-financeable product – such as a standard office building in Frankfurt – the margin is 80 bps,” said Deutsche Bank director Jorg Oestreich. “Why are people financing things so cheaply?”
Isabelle Scemama (pictured), AXA Real Estate’s head of fund groups, said the “very low” spreads inhibited the insurer’s lending more in Germany. AXA, the largest non-bank lender in Europe, looks for a margin over alternative bond investments of 100-150 bps.
AXA continues to lend predominantly on European, secured real estate assets, but “We have started to invest in unsecured loans and in the US,” Scemama said.
“The premium that Europe offered is less today and the US market is well structured with some better protection mechanisms. In Germany, mortgage lending is so expensive that we prefer to lend to low leveraged property companies that offer attractive returns.”
Several panellists felt that margins were nearing the bottom and could not go much lower. “New banking regulations are forcing us to increase our equity but how can we do this by earning less with lower margins?” said Alexander Saur, general manager of Natixis Pfandbriefbank.
“Costs have increased and there are more regulatory requirements,” agreed Norbert Kellner Helaba’s head of real estate debt capital markets. “Margins can’t go much lower.”
To cope with lower margins, senior lenders have been increasing leverage, and teaming up with mezz providers, where LTVs of 75% or even 80%, can command blended margins of 2-2.5% or more.
Meanwhile, the intense competition for assets in Germany is pushing investors and their lenders out of core and the “Big Seven” cities; leverage is rising.
“Asset quality is going down and investors are moving to B or C locations. This is not what lenders prefer,” said Pbb Deutsche Pfandbriefbank’s head of German real estate finance Gerhard Meitinger.
However, panellists agreed that Germany was not in a real estate bubble. “I don’t see that the market is pricing through risk, and everybody is doing due diligence,” said Michael Ramm, managing director and co-head of acquisitions at JP Morgan Asset Management.