New Business Report

Real Estate Financing

Germany | 1ˢᵗ half of 2020Published in September 2020

New business fi gures and loan portfolios for the commercial real estate fi nancing of German banks

The eff ects of the corona pandemic had not yet been felt in the fi rst quarter, at least not in the investment market; how-ever, the crisis has now hit the real estate and banking sector with full force. Both building occupiers and investors, includ-ing project developers and fi nanciers, are currently acting with great caution. Developments in the investment and let-ting markets are decisive for assessing the value of property, including as loan collateral. In some segments, temporary rent arrears or even the complete deferral of rental payments are currently still having a considerable impact on pricing.

To cushion the eff ects of the coronavirus pandemic, the largest economic stimulus package in Germany’s history to date with a volume of around 4.0% to 4.5% of the gross do-mestic product was put together; this consisted of four large blocks comprising aid for consumers, businesses and local authorities, and investment in the future. Without these measures, the number of unemployed would have risen much more sharply, more reduced working hours would have been imposed, and the overall distortions would have been much more serious. According to the ifo Business Climate Index however, companies in Germany see light at the end of the tunnel again, although the pre-coronavirus level will probably not be reached until 2022.

The eff ects of the coronavirus pandemic are now also evident in the transaction volume In the fi rst half of 2020, the transaction volume of EUR 42.5 billion in the investment market exceeded the corre-sponding period last year by 31%. Most of this result was

Real Estate Transaction Volume in Germany

New business fi gures and loan portfolios for the commercial real estate fi nancing of German banks

Status: July 2020; Source: JLL

generated in the exceptionally strong fi rst quarter, with just 35% contributed to the half-yearly volume in the peri-od from April to June. This is clear evidence that the coro-navirus pandemic and its consequences have also reached the investment market.

Few of the company takeovers and share deals that domi-nated the fi rst quarter took place at all in the second three months of the year. Meanwhile, the share of portfo-

New Business Report Real Estate Financing | September 2020 2

lio transactions in the second quarter fell signifi cantly to around half of the volume.

Nevertheless, there is enormous liquidity in the market and numerous institutional and private investors are looking for attractive investment opportunities. As is so oft en the case in times of crisis, demand is increasingly focused on the Core segment. However, not every property classifi ed as Core before the crisis is still classifi ed as such today. Above all, products with long-term lease contracts and stable ten-ants, preferably state-owned, are in greater demand than ever. Such properties do not attract price discounts, rather

the opposite is the case. Conversely, demand for Value-add products or development projects that are being construct-ed on a speculative basis or which have not achieved a (suff icient) pre-letting quota is declining.

The fi nancing environment for Core products still appears stable, with banks and insurance companies remaining active as capital providers. Although fi nancing terms have risen by around 30-70 bps, they are still almost the same as before Covid-19 in relation to the lower yields on gov-ernment bonds. In contrast, the cost of capital for Value-add properties and development projects has increased

Volume of New Commercial Real Estate Financing Business of Selected Banks

BankH1 2019

in € billionH1 2020

in € billionChange

H1 2020 / H1 2019Target 2020

vs. 2019

LBBW 2,60 3,10 19%

DZ Hyp 2) 3,70 2,80 -24%

Bayern LB 2,10 2,20 5%

Berlin Hyp 2) 1,30 2,00 54%

Berliner Sparkasse 2) 4) 1,88 1,90 1%

Helaba 3) 1,90 1,80 -5%

pbb Deutsche Pfandbriefbank 1,90 1,20 -37%

MünchenerHyp 2) 1,10 0,90 -18%

Deutsche Hypo 2) 0,50 0,40 -20%

Hamburg Commercial Bank 2) 2,00 0,30 -85%

Aareal Bank 1) 0,10 0,25 148% n/a

DekaBank 0,00 0,00 0%

Total 19,1 16,8 -12%

1) New busines fi gures include qualifi ed extensions 2) Excluding extensions 3) Medium and long-term new business 4) New business under contract Source: JLL, bank information

New Business Report Real Estate Financing | September 2020 3

much more strongly by an average of 100-200 bps. In the case of large-volume transactions, fi nancing takes much longer than before the crisis with many fi nanciers check-ing the willingness to pay and the solvency of tenants, or any existing rental shortfalls. The forecast remains mixed at the mid-year point. On the one hand, some sales pro-cesses are continuing or are re-starting, and some larger transactions may be successfully completed in the next two quarters. On the other hand, the situation will remain diff icult for the rest of the year in the particularly aff ected retail real estate segment (excluding food retail), and ho-tels. As banal as it may sound, even the sustained low lev-el of travel activity hinders the conclusion or continuation of some transactions.

On this basis, we expect a volume of around €70 billion for 2020 as a whole. This would be a decrease of almost a quarter compared to 2019. New business signifi cantly reducedTo assess the situation in the fi nancing market for com-mercial real estate in Germany on a quantitative basis, JLL has analysed and evaluated current and planned new business fi gures and existing loan portfolios.

In addition to the fi nancing of commercially used proper-ties, commercial real estate lending includes the fi nancing of residential real estate used for investment purposes. This analysis comprises a selection of German banks

Loan portfolios for commercial real estate fi nancing (Germany and abroad) by selected banks

Source: JLL, bank information

New Business Report Real Estate Financing | September 2020 4

whose reports include a breakdown of the corresponding fi gures from which comparisons can be drawn. New busi-ness fi gures refer to volumes in Germany, while loan port-folio data refl ects the total volume in Germany and abroad. These fi gures do not include the raising of funds using capital market products such as increasing capital or the issuing of shares.

The volume of new business in Germany of the participat-ing banks has declined by 12% since last year. While fi ve banks were able to increase their volume, six showed de-clines. In their forecast for 2020 as a whole, eight banks expect a lower volume than in the previous year; no bank expects an increase.

Loan portfolios increased againMeanwhile, the loan books of two-thirds of the partici-pants have grown. In total, the increase was 4%. The strongest growth was achieved by MünchenerHyp with +21%. Four banks recorded a reduced loan portfolio. Once again, the volume of new business was apparently higher than the volume of repayments from maturing loans at many banks, partly as a result of loan extensions.

Outline conditions and outlookAt the mid-year point, the German Real Estate Finance In-dex (DIFI), the sentiment indicator for commercial real es-tate fi nancing in Germany published by JLL and ZEW, has painted the most pessimistic overall picture since the sur-vey began in 2011, reaching a historic low. Both the fi -

nancing situation and outlook are aff ected. The off ice and hotel segments were the hardest hit, while the logistics and residential segments were the least aff ected. In the case of off ices, the declining demand due to the uncertain economic situation and expectation of increasing home off ice use is noticeable, at least in the short-term; howev-er, expectations for both the off ice and hotel segments have since recovered noticeably.

Nonetheless, one cannot speak of a liquidity crisis because good-quality products are still in demand with banks and are fi nanced at higher prices, even if partly at a lower loan-to-value. The period of pressure on margins in recent years now appears to have passed. Only residential property, which has proven to be a crisis-proof investment product, has recorded declines. Average margins have increased for the other use types. Consequently, attention should be paid to the increased liquidity costs which are passed onto the customer as part of the margin. In the wake of the coro-na crisis, these have tended to rise more sharply for Pfand-brief banks than for deposit refi nancing. However, we ex-pect liquidity costs and consequently margins to decline slightly once the situation returns to normal. The market has shown the fi rst signs of this since mid-June.

Even if the economy - supported by the fi nancial aid pack-ages - is slowly starting up again, market participants still expect delayed eff ects in the real estate sector. The fi -nancing environment will remain noticeably diff icult in the high-risk segment at least until 2021.

New Business Report Real Estate Financing | September 2020 5

Helge ScheunemannHead of Research GermanyHamburg+49 (0) 40 350011 225helge.scheunemann@eu.jll.com

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