German financiers' confidence in the real estate market has never been so low, according to the latest quarterly survey by consultancy firm BF.direkt.
The pessimistic outlook is ascribed to a shortage of product combined with strong competition in the market, shrinking margins and an expectation that refinancing costs will rise.
Only a quarter of participants expect new business to increase in the short term, the lowest figure since the BF.Quarterly Barometer began. A further 56% predict new business will stagnate while only 20% forecast an increase.
The overall barometer score of -3.88 was at its lowest recorded level and more than four points down on the Q3 2018 score of +0.43.
Professor Steffen Sebastian, chair of real estate finance at IREBS and academic adviser to the BF.Quarterly Barometer, said: 'New business is becoming increasingly difficult for financiers. On the one hand, that is partially due to the constantly decreasing number of properties available on the market that meet the banks’ risk criteria.
'On the other, very strong competition is playing a role. A third of all loans are not being concluded because demand is too high and competitors are winning the contracts.'
Volumes shrinking
The proportion of lenders who see the market in positive terms has halved since the end of 2018 from 36.1% to 17.6%, another record low. Lenders also reported an overall decrease in the volume of new customer business: the proportion of loans greater than €50 mln decreased to by 7.7 percentage points to 18.8%, while loans of between €10 mln and €50 mln were up by 5.7 points to 46.9%.
The survey also recorded a rising trend in liquidity costs, with 40% of institutions reporting that refinancing costs had increased, while only 13% expect costs to fall.
Margins, loan-to-value and loan-to-cost figures are holding firm, with LTVs for existing properties slightly higher at 71.7% while LTCs for project developments stagnated at 73.7%.
'Financiers are getting stuck in a vicious cycle,' said Sebastian. 'Their refinancing costs are increasing, but they can’t pass those costs on to their customers in the form of higher margins.'
As traditional loans become more difficult to achieve, demand has increased for alternative financing, with around 60% of banks observing an increase in demand. Mezzanine capital is the most popular choice, accounting for 36.7% of total demand, followed by equity capital on 28.6%.
Manuel Köppel, CFO of BF.direkt AG, said: 'Following a property boom that lasted for years, and relatively positive sentiment among financiers, many market participants take a significantly more pessimistic view of the future. A whole series of factors that affect the banks’ business have worsened.'
