Sentiment among German property finance providers is brightening significantly in the third quarter and rising substantially. The barometer score climbed from -15.24 points in the second quarter of 2020 to -7.97 in the third quarter of 2020. This indicates a strong recovery: The coronavirus crisis and its consequences had previously led to a significant deterioration in all key parameters. This is the central finding of the latest BF.Quarterly Barometer, as prepared by bulwiengesa on behalf of BF.direkt AG, and discussed as part of an online press conference with Torsten Hollstein, Managing Director of CR Investment Management, Thomas Jebsen, Member of the Management Board of Deutsche Kreditbank AG (DKB), Manuel Köppel, CFO of BF.direkt AG, and Professor Steffen Sebastian, Chair of Real Estate Finance at IREBS, University of Regensburg.
Among other factors, the improved sentiment is due to the general assessment of the state of the financing market. 60% of those surveyed say that the situation is more restrictive (-20 pp) after 80% in the previous quarter. The perception of the development in new business is also slightly more positive. Only around 33% of institutions expect a decline in new business, down from 58% in the previous quarter. Almost half (44%, up 19.4 pp) expect conditions to remain unchanged.
Another key factor that has improved greatly is refinancing costs. A third of respondents expect refinancing premiums to drop (up 33 pp), while only 18.5% assume that they will rise (prior quarter: 83%). Almost half of those surveyed anticipate that liquidity costs will remain unchanged (48%, up 31.5 pp).
Risk minimisation was cited as the most crucial point in new business for the first time at 20.9% (up 2.5 pp). By contrast, at 9.1%, the generation of new customers plays a significantly smaller role than the average taken from past BF.Quarterly Barometers.
Professor Steffen Sebastian, Chair of Real Estate Finance at IREBS, University of Regensburg, and scientific adviser to the BF.Quarterly Barometer, said that “institutions are currently focusing on risk minimisation rather than new customer acquisition. However, the fact that some market players are cutting back on lending does not mean a shortage on the property finance market. As Germany is overbanked anyway, this is more likely to indicate a return to a healthy normality on the commercial property finance market.”
Manuel Köppel, CFO of BF.direkt AG, added: “As expected, the extreme movement on the barometer last quarter was just a single moment in time at the peak of the shutdown in Germany. The significant improvement in the quarterly barometer does not come as a surprise as ongoing business is currently doing much better than the general mood would suggest. The restraint being shown by many financing providers also means opportunities. As no-one is able to finance everything anymore, this will mean good times for property finance brokers once again.”
LTVs and LTCs rise, margins remain stable
Loan-to-value ratios have risen slightly again. The average loan-to-value (LTV) on the financing of existing properties climbed to 67.4% (Q2 2020: 65.6%) and the loan-to-cost (LTC) on the financing of project developments to 73.1% (Q2 2020: 71.1%). Margins therefore remained largely stable. For the financing of existing properties, they increased minimally from 147 to 148 basis points, and for the financing of project developments they fell from 231 to 226 basis points.
Manuel Köppel commented: “Institutions haven’t reduced their loan-to-value ratios any more, rather they increased moderately at the height of the crisis. Margins also didn’t rise sharply again as they did in the previous quarter, and instead were stable or down slightly. That indicates that at least the worst of the coronavirus pandemic is behind us on the commercial property finance market.”
Logistics properties seen as safe financing
The coronavirus pandemic is also affecting the property segments being financed. In financing for existing properties, the significance of logistics properties rose the most by 2.9 pp to 17.9%. By contrast, fewer micro apartments and hotels were financed. At 21.4%, residential and office properties share first place in properties financed by institutions in the existing properties segment. The story is similar in the financing of project developments. First place goes to residential projects, followed by offices.
Thomas Jebsen, Member of the Management Board of Deutsche Kreditbank AG (DKB), said: “Even in the coronavirus pandemic, our sector focus has been upheld. We primarily finance projects in the residential property sector, and we do not feel that risks to our business model have increased either here or in nursing care facilities. The situation is different for hotels. At this time there are no doubt special challenges here that are affecting the individual sub-segments such as business or leisure hotels differently. We do not finance other asset classes.”
Torsten Hollstein, Managing Director of CR Investment Management, added: “We are anticipating a rise in non-performing property loans by the end of the year. In particular, the leisure sector, convention hotels and certain sections of the retail sector are suffering massively under the impact of the coronavirus restrictions. We are anticipating a potential wave of insolvencies here by the end of the year, once the temporary easing of insolvency law comes to an end. The consequence of this will be that tenant quality will play a more significant role once again, and risks will be weighted more heavily in pricing – which was not always the case in the property boom of recent years.”
The BF.Quarterly Barometer surveys more than 120 experts, most of whom are directly responsible for lending to real estate companies. The panel comprises representatives of different banks and other financiers. The BF.Quarterly Barometer score is a composite of various components of the survey. The components analysed include the respondents’ assessment of changes in financing conditions, new business development, the volume of loan tranches newly granted, the risk propensity for lending by asset class, LTV/LTC scores, margin development, the relevance of alternative financing options and the development of liquidity costs.
Pictured : Steffen Sebastian
Source : BF.direkt AG, IREBS, Deutsche Kreditbank AG and CR Investment Management