Real estate financing experiences a sharp decline
New business in commercial real estate financing is expected to decline by over a quarter compared to the already slightly weaker previous year, according to estimates from interviews conducted as part of the German Debt Project by the IREBS Real Estate Academy at the University of Regensburg. A total of twelve credit institutions were personally interviewed, ranging from Aareal Bank to HypoVereinsbank, Kreissparkasse Köln, DekaBank, Haspa, Münchener Hyp, and Volksbank Odenwald. The decline in new business is expected to be as significant as in 2020 (-26.5%).
During the presentation of the annual project conducted by IREBS, Tobias Just, who holds the chair of real estate economics, highlighted the significant variability in the responses spanning from stagnation to a decline of 75%. Additionally, the survey revealed that institutions that experienced significant growth in new business in 2022 were particularly pessimistic about the current year, while those with minimal growth in the previous year had a more optimistic outlook for the future of their business.
The trough is expected to be reached in 2024, followed by, at best, a moderate recovery. In 2022, loan portfolios grew by 1.2%, according to IREBS. The highest growth was recorded in 2019 when it reached 8.1%.
Interesting shifts in financing
Significant alterations in the allocation of financing among various usage categories came to light in the survey. Residential and logistics continued to grow strongly, while office financing showed below-average growth. Negative assessments continued to dominate in retail, hotel, and healthcare properties. However, there was a slight improvement in hotel and retail, albeit from a low base, according to interviewees from the German Debt Project.
Financing was heavily concentrated on large projects in the hundreds of millions of euros, which is unusual for recessions. Typically, smaller transactions dominate during economic downturns. The rationale for this change lies in two key developments: numerous transactions were halted, and investors shifted their focus towards high-value core properties.
Regulation puts strain on banks
Regulation has become a significant burden for banks. More on-site examinations, intense discussions about appropriate evaluations, and a lack of expertise in differentiating asset classes and regions could lead to procyclical developments, the researchers warn.