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The retreat of German banks from frontline real estate lending continues, creating fertile ground for alternative lenders to step in (See "Debt funds moving from the margin to the mainstream," in this issue of REFIRE). A recent analysis by JLL highlights this shift, with declining loan portfolios, cautious new business underwriting, and an increased focus on low-risk asset classes.
What's clear is that German banks have significantly scaled back their real estate lending. In the first half of 2024, new lending commitments totaled €13.2 billion, a 6% drop compared to H1 2023. This decline follows a sharper 25% year-on-year decrease from 2022 to 2023. Loan portfolios have also shrunk slightly, down to €295 billion from €298.2 billion a year earlier, signaling banks’ reluctance to expand exposure in a turbulent market.
Among the banks surveyed, some experienced notable reductions. Helaba recorded the largest portfolio decrease, shedding €2.8 billion to reach €35.6 billion. LBBW/Berlin Hyp, Germany’s largest real estate financier, reported a €1.4 billion decline, bringing its loan book to €56.3 billion.
When banks do lend, they are prioritizing safer, low-risk real estate classes. Logistics and residential assets dominate, given their relatively stable cash flows and risk profiles. Financing for office properties is highly selective, limited to prime locations with long-term secured cash flows and strong ESG credentials. Non-core office segments face shrinking liquidity. As Helge Scheunemann, Head of Research at JLL Germany, puts it: “Liquidity for office properties in non-prime segments is declining significantly.”
Banks' retreat opens new doors for alternative lenders
This cautious approach has created significant opportunities for alternative lenders, particularly in whole loans and mezzanine financing. International and alternative financiers are gaining market share, benefiting from stricter regulations on traditional banks. The impending Basel IV standards, set to take effect in 2025, will further constrain banks’ ability to finance riskier projects. These rules will require higher equity backing for developments, making alternative lenders even more relevant. Dominik Rüger, Team Leader Debt Advisory at JLL Germany, explains: “Alternative providers are positioned to gain ground, especially in whole loans and mezzanine financing. Regulation is playing into their hands.”
Alternative lenders are seizing this opportunity by offering flexible financing solutions that banks are unwilling or unable to provide. Whole loans and stretched senior loans are emerging as preferred instruments, offering attractive risk-adjusted returns for investors while bridging the gap left by banks. Recent examples include international debt funds partnering with German developers to finance residential and logistics projects that traditional banks view as too risky under current regulations. One prominent player, FAP Group, has reported increased demand for alternative lending solutions, particularly for developers needing liquidity to maintain or expand their portfolios. According to FAP’s recently-published 2024 Debt Report, whole loans now account for a significant share of new financing requests, a trend expected to grow as Basel IV takes effect.
Despite the overall retreat, a few banks have shown signs of recovery in new lending. Helaba saw a 67% rise in new business to €1 billion. Münchner Hypothekenbank grew by 40% to €0.7 billion. LBBW/Berlin Hyp remained the most active lender with €4 billion in new business. However, this uptick is narrowly concentrated among a handful of institutions and does little to offset the broader market decline.
Non-performing loans signal a cautious lending climate
German banks are also grappling with non-performing loans. While some NPL portfolios are being marketed, volumes remain relatively low and have yet to significantly impact purchase prices. The growing focus on NPLs highlights banks’ increasing caution, as they look to offload riskier assets and rebalance their portfolios.
While alternative lenders are stepping up, they are not without their challenges. Rising interest rates and regulatory uncertainties in Germany could impact their cost of capital and overall profitability. Investors in whole loans and mezzanine financing must also remain vigilant about asset performance, especially in volatile segments like offices and retail. Nevertheless, the higher yields offered by alternative debt instruments—often surpassing 6–8%—continue to attract institutional and private capital looking to capitalize on gaps left by traditional lenders.
As traditional banks pull back further, the balance of power in real estate finance is shifting. Alternative lenders are no longer niche players—they are becoming the architects of new financing models. With regulation favoring their rise and demand for flexible funding solutions increasing, their role in shaping Germany’s real estate landscape will only deepen in the years to come.
