German Debt Project confirms falling margins, rising LTVs

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German bank lenders to real estate are seeing falling margins and rising LTVs, although in both cases more modestly than expected, while new business growth is now back in single digits for the first time in four years, at 9%. Lenders are focusing more heavily on the bigger cities and retreating from provincial lending, while the key growth areas are development finance, operator real estate, and residential housing suitable for institutional investing.

These are the key findings of the now well-established "German Debt Project", just published for the third year in a row under the auspices of the IREBS International Real Estate Business School of the University of Regensburg, with the support of the Association of German Pfandbrief Banks (vdp) and nine well-known companies from the real estate sector.

According to Jan Bettink, vice-president of real estate lobying group ZIA Zentraler Immobilien Ausschuss and president of the vdp, and in his day job chairman of mortgage lender Berlin Hyp, “The IREBS study is an important indicator of current financial stability surrounding real estate finance. The finance market for commercial real estate is extremely robust, which is reflected in the modest growth in lending. The banks have only extended the LTV ratio slightly and are dealing with risks in a responsible manner. The real estate sector currently does not pose any threat to the finance market.”

While new business growth of 9% returned to single figures in 2014 (2011–2013: +15% to +22% p.a.), this is still a high level of new business in absolute terms, say the two authors of the study, Prof. Tobias Just and Markus Hesse of IREBS. Lenders expect a similar dynamic to be maintained in 2015, although they are braced for a further reduction in the growth rate in the coming year 2016, of low single figures (+1.3).

“This lower growth scenario is due to several factors, although the most important aspect is surely the level achieved and, associated with that, the scarcity of attractive projects to finance”, says Professor Just. The pressure on existing lending is expected to remain high, while banks need to generate new business.

Geographically, too, the banks are shifting focus. Lenders who have remained active abroad are increasingly contemplating new international opportunities. According to Markus Hesse, co-author of the report, “some banks are increasingly looking abroad again in addition to financing property in A-cities here in Germany rather than continuing to finance projects in provincial German towns”.

This would suggest that the much-hyped new interest in Germany's B-cities is increasingly being catered for by a different category of lender, primarily the Sparkassen (savings banks) and Volksbanken (cooperative-banks), as well as their partners. The seven A-cities’ share in new business lending from the traditional lending banks increased in 2014 to 66% from 55% the year before, underpinning the trend.

The erosion in margins and the rising LTVs in 2014 have turned out to be substantially lower than lenders had expected in last year’s report. The net margin decreased by only 4 basis points to 129 bps instead of 114 bps. The same is true of LTVs; LTVs increased by 2 percentage points to 67% in 2014 – whereas last year's survey suggested an increase to around 69%.

While LTV's are still expected to approach 70% on average by 2016, lenders are forcasting a margin decline to 109bps by 2016 – below the level in the crisis year of 2010 despite the extra regulatory and levying costs imposed on the banks since then.

The German Debt Project was initiated by research firm Real Capital Analytics and is co-sponsored by: bf.direkt, bulwiengesa, Commercial Real Estate Finance Council Europe (CREFC), Cushman & Wakefield, ENA, INREV, JLL, and the Zentraler Immobilien Ausschuss (ZIA).