New Business Report. Real Estate Financing. Germany 1ˢᵗ half of 2017 Published in October 2017

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1 New Business Report Real Estate Financing Germany 1ˢᵗ half of 2017 Published in October 2017

2 New business figures and loan portfolios for commercial real estate financing by German banks Rally in the German real estate investment market continues Germany s expanding economy and the prevailing highly favourable monetary environment have ensured that the rally in the German real estate investment markets has continued. The good first quarter performance with a total investment volume of 12.6 billion was actually overtaken in the second quarter with a volume of 13.2 billion. At 25.8 billion, the first half year s transaction volume was an increase of 47% compared to the same period in 2016; the only superior performance to date was in the first half of Scarcity of available product continued to increase, and there would certainly have been a higher potential transaction volume on the demand side had there been an adequate and sufficient supply on the market. The strength of demand in the commercial real estate investment market is also evident from the fact that in most transactions, in addition to the eventual purchaser, there have typically been in excess of 10 other interested parties involved (who went home empty-handed). It also shows that not all portfolio owners are under pressure to sell, that banks are continuing to examine deals in great detail (scrutinising the sustainability of loans), and that investors are also behaving cautiously. ume. Prime yields in all use classes remained stable at very low levels over the second quarter of Momentum was sustained in the market for commercially-traded residential investments, with a transaction volume of 6.2 billion in the first six months, which is a yearon-year increase of 40%. Whilst just a few years ago portfolios tended to be broad-based and of varying quality, the portfolios now being traded are more clearly focused and in some cases, specifically packaged for particular purchaser groups, for which there are also higher asking prices. The total investment volume of both com- Commercial property and commercially-traded residential property transaction volume in billion As at: July 2017; source: JLL In the first half of the year, the five largest transactions were portfolio deals, of which the largest was the sale of the German component of a portfolio of 74 logistic properties by Blackstone to CIC with a volume of around 1.9 billion. The geographical focus was on the Big 7 real estate strongholds, which accounted for almost half of the total investment vol- New Business Report Real Estate Financing October

3 mercial real estate and commercially-traded residential properties in the first half of 2017 was 32 billion, which is a significant increase of 45% compared to the first half of New business is slightly down year-on-year In order to assess the situation in the German commercial real estate financing market on a quantitative basis, JLL has compiled and evaluated both actual and planned new business figures and existing loan portfolios. In addition to the financing of commercial properties, commercial real estate lending also includes the financing of commer-cially-traded residential property to legal entities as borrower. This analysis comprises a selection of nationally-active German banks whose reports include a detailed breakdown of figures allowing comparisons to be made. The banks analysed here account for almost 70% of all new business volume in the German market. New business figures refer to volumes in Germany, while loan portfolio figures reflect the total volume in Germany and abroad. These figures do not include the raising of funds through capital market products such as issuing new shares and bond issues billion of new business was awarded over the review period; however, there was an average decrease in new business volume of 8% across all 13 participating banks* compared to the first half of The volume was lower in the case of six banks, two remained at around the same level and five banks reported an increase in new business New commercial real estate financing business in Germany by selected banks Bank H in bn H in bn Change H1 2017/H Plan 2017 compared to 2016 DG Hyp 2) % Helaba 1) % HSH Nordbank 2) % pbb Deutsche Pfandbriefbank % Bayern LB % Berlin Hyp 2) % Berliner Sparkasse 4) % Deutsche Hypo 2) % Münchener Hypo 2) 6) % Deutsche Postbank 5) % WL Bank 3) % DekaBank % Aareal Bank % Total % 1) Medium and long-term new business 2) Excluding prolongations 3) Value only for financing secured on commercial properties 4) Contracted new business excluding prolongations 5) New business also includes qualified prolongations, i.e. new financing agreements at the end of the term of existing loans; but not merely interest rate adjustments at the end of the fixed contract terms 6) Reporting has been changed Source: JLL, bank information, financial reports, press releases *Until further notice, the Hypovereinsbank is no longer taking part in this survey. For comparison purposes, the volume from the first half of 2016 is also not included in the calculations. New Business Report Real Estate Financing October

4 awarded. All banks remained below the 3 billion mark, and the highest volume of new business amongst the banks under review was placed by DG HYP with 2.6 billion. DG HYP participated in the financing of the Galileo project at the Technical University of Munich campus, and also financed the purchase of the NH Hotel in Weinheim by Deutsche Fondsvermögen (DFV). The assessment of the current business situation has been stable to slightly improved over the past six months. However, future expectations for the medium-term are more subdued, a sentiment that had already been identified in the second and third quarter DIFI (German Real Estate Finance Index) reports published by ZEW and JLL. The pressure on margins had long since extended to include all use classes and risk categories. Banks are still reacting to the tension brought about by the increasing regulatory requirements (including capital backing requirements) and the highly competitive environment, with the latter responsible for keeping margins at a low level on an international comparison. In order to bring the tight margins into line with rising administration costs, banks business models are not just being reconsidered theoretically as in the past, but action is also being taken. One example is the strategic partnership between Mountstreet and the Aareal Bank, with the objective of improving the operational basis and realising income potential. This approach is also being considered by other market players. Meanwhile, the ongoing Pfandbrief mortgage bond issues are keeping the cost of funds for banks low. Nonetheless, there are increasing numbers of banks which are no longer making regular issues because of the pressure to invest and increased levels of liquidity. Loan portfolios for commercial real estate financing (Germany and abroad) by selected banks 1) Values only for financing secured on commercial properties; 2) Loan portfolios excluding open external commitments; 3) Reporting has been changed Source: JLL, bank information, annual reports, press releases New Business Report Real Estate Financing October

5 Slight increase in loan portfolios Despite the falling volume of new business awarded in the first six months of this year, banks aggregate loan books have increased. In the case of eight participants, loan portfolios have increased and three respondents reported a decrease. Helaba, Aareal Bank and pbb Deutsche Pfandbriefbank still have the largest loan books. At the end of 2016, the total volume was billion and this has increased slightly by 1.4% to its current level of billion. Although there has been a reduction in new business, it has still been sufficient to overcompensate for repayments. It is likely that there will be a growth in syndication activity by banks, but this is difficult to quantify accurately. Nonetheless, there has been no noticeable deterioration in loan book quality. The trend towards falling yields is not necessarily causing banks to adjust their lending guidelines or relax their criteria when granting loans. This points to robust LTV ratios in the event of possible value corrections. Overall conditions and subdued outlook Germany has close links to the global economy and has thus observed politically turbulent times over the past six months. The formal separation of the UK from the EU has begun and there are clearly noticeable nationalistic tendencies across Europe (for example, as shown by the elections in The Netherlands, France and the UK) and it remains unclear how relations with the USA will develop in future. Even if the precise effects of individual events are unclear, all five of Germany s principal trading partners are involved. In spite of this, the German real estate investment market and activities of lenders have held their ground in the current environment. The new business forecast for the full year 2017 compared to 2016 has changed in the case of four banks compared to the survey one year ago. Seven banks report that new business volume in 2017 will be similar to 2016, five report that it will be lower (including the two banks with the largest new business volumes recently), and just one expects that new business volume will be higher. Germany is likely to remain in investor focus as an investment destination. The German real estate investment volume in 2017 will be at around the same level as However, most banks surveyed as part of the DIFI expect a continuation of the subdued financing environment. Any gaps in financing tend to be filled by equity capital or alternative, and in some cases foreign debt finance providers. JLL expects that interest rates will remain low and are unlikely to be increased by the European Central Bank as long as there continues to be financial difficulties in a number of EU countries and in a number of banks, and there is no significant rise in inflation. New Business Report Real Estate Financing October

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