RossHelen/Envato
The financial district in Frankfurt am Main, Germany
Germany’s real estate financing is no longer in freefall, and is cautiously stirring after a prolonged slump. Banks are cautiously reopening credit channels, presenting borrowers with a mix of fresh opportunities and significant challenges. Still, for a sector grappling with prolonged economic and regulatory strains, the margin for error has narrowed considerably, and the outcomes for both lenders and borrowers could have lasting consequences.
The latest BF.Quarterly Sentiment Index, a key barometer of real estate financing sentiment, highlights this tentative recovery. The index rose for the fifth consecutive quarter in Q4 2024, reaching -9.89 points, a significant improvement from its all-time low of -20.22 points in Q3 2023. While still in negative territory, this upward trend signals growing confidence among financiers. Around 39% of respondents now report stable or increasing new business, a substantial rise from earlier in the year. Financing conditions are also showing signs of improvement, with 8% of respondents rating conditions as progressive—a notable shift after several quarters of zero positive sentiment.
Francesco Fedele, CEO of BF.direkt AG, observed, “We are also seeing the improved sentiment in the market. Until Expo Real at the beginning of October, the mood was still cautious, but since then it has noticeably improved. Factors like a stabilizing interest rate environment and a clearer regulatory path have contributed to this shift, and we’ve seen more financing transactions picking up as a result.”
Lending still dominated by residential real estate
Residential real estate continues to dominate lending activity, buoyed by stabilizing prices and sustained demand. According to the Association of German Pfandbrief Banks (VdP), new loans for residential properties reached €56.7 billion in the first nine months of 2024, a 16% increase compared to the same period last year. Condominiums and single-family homes were particularly strong performers, with loan volumes for condominiums rising by over 39% year-on-year. However, multi-family housing saw an 8.8% decline in loan volumes, underlining persistent challenges in certain segments.
Commercial property lending remains sluggish, reflecting broader market difficulties. Total commercial real estate loans amounted to €32.9 billion in the first three quarters of 2024, a 5.7% decline year-on-year. The office sector, which traditionally accounts for over half of all commercial real estate loans, continues to struggle, with a 4% reduction in lending activity. “The trend for commercial real estate loans is even more restrained, although the pace of decline has slowed noticeably over the course of this year,” said Jens Tolckmitt, Managing Director of the VdP. Retail properties, however, bucked the trend, posting modest gains.
Bundesbank worried about banks' outdated risk models
The Bundesbank has raised alarms about banks relying on outdated risk models that inadequately capture emerging challenges in the real estate sector. These models often overlook key factors such as the impact of rapid market shifts, evolving economic conditions, and the fluctuating values of collateral, according to Karlheinz Walch, Head of the Central Department for Banking and Financial Supervision. Speaking at the recent Börsen-Zeitung Real Estate Day in Frankfurt, Walch criticized banks’ reliance on legacy data that fails to reflect current market conditions. “Each institution must ask itself how well its model and data are suited to properly estimate current risks,” Walch stated. The Bundesbank also called for stricter scrutiny of collateral valuations and emphasized the importance of forward-looking risk provisions. Walch warned that in residential lending, any relaxation of standards could risk reintroducing vulnerabilities to the system.
Adding to the complexities, Basel III's forthcoming regulatory framework—effective January 1, 2025—introduces significantly stricter capital requirements, demanding a 72.5% minimum "output floor" for risk-weighted assets. These measures differ from current standards by imposing more uniform and stringent criteria, which could raise the cost of lending and tighten credit availability, particularly in the real estate sector. These rules will impose stricter capital requirements on banks, including a 72.5% minimum “output floor” for risk-weighted assets. Gero Bergmann of the VdP argued that the regulations could disproportionately affect real estate financing by raising the cost of capital. Margins are already rising in anticipation, with portfolio financing costs increasing by 22 basis points and development financing by 25 basis points in Q4 2024.
Amid these challenges, there are glimpses of optimism. Loan-to-value (LTV) and loan-to-cost (LTC) ratios have edged upward, now averaging 60% and 68.7%, respectively. “The banks are moving forward a little,” commented Fedele. Residential lending remains robust, supported by stable interest rates and unmet demand. However, commercial property sectors face structural hurdles as they adapt to new regulatory and market conditions.
