Property lenders in Germany expect margins to fall and loan to value (LTV) ratios to rise in the coming year following tougher competition in the course of 2014.
Property lenders in Germany expect margins to fall and loan to value (LTV) ratios to rise in the coming year following tougher competition in the course of 2014.
The rise in competitive pressure as well as the financial and operational burdens posed by increased regulatory requirements are the two main challenges facing financial institutions, according to a survey conducted as part of the German Debt Project by the International Real Estate Business School (IREBS) in Regensburg.
The survey, initiated by market research firm Real Capital Analytics, polled 32 German financial institutions with a combined credit volume of €229 bn and representing about 50% of the commercial real estate lending market. It is the second time the survey – which aims to increase transparency in the German commercial real estate lending market – has been conducted.
The tougher competition among lenders in the course of 2014 was, according to interviewees, often underestimated. However, the forecast increased LTVs and poor margin prospects are ‘no reason for concern’, said co-author Markus Hesse, ‘because the institutions were able to increase the margins gradually within the last four years and to keep the loan-to-value ratios stable or even to reduce them slightly’.
‘For real estate financing institutions, it is important not to rely only on the positive German economic outlook and, above all, on historically low interest rates,’ commented Prof. Dr. Tobias Just, chair of real estate at IREBS. ‘To escape the rising competitive pressure, it is now necessary to occupy profitable niches that offer a higher margin potential.’
After falling for several years, the survey recorded 0.8% growth in the lenders’ loan books over 2013. ‘The "clean-ups" that appeared necessary in the wake of the crisis since 2008, have now been completed to a large extent, so that now expansion dominates the market,’ it noted.
On the growth side, most institutions are optimistic about the expansion of their loan books and new business. For 2015, 72% of the 32 surveyed financial institutions expect growth in their loan books, with 32% expecting an increase of more than 5%.
For 2014, institutions expect a weighted average growth of 2.6%, rising to more than 3% for the subsequent two years.
Key phrases in this year’s survey were ‘prime locations in secondary cities’ or ‘secondary locations in prime cities’, indicating the increased willingness to invest in such locations, the authors said. The perceived reluctance to provide financing for properties in secondary cities has decreased significantly. This, according to the authors, is a result of rising competitive pressure as well as of decreasing financing potential in prime cities. ‘Thus properties in Germany, even in less favourable locations in secondary cities, are able to obtain a broad range of finance facilities. Good news for the real estate market,’ the survey said.
IREBS International Real Estate Business School is part of the Business Faculty of the University of Regensburg and includes the IREBS Institut and the IREBS Real Estate Academy.