“New Business Report from JLL Reveals Shifts in Real Estate Financing for 2022”

The transaction volume, which has fallen significantly as a result of the changed interest rate environment, is increasingly having an impact on real estate financiers.

Last year, the major German real estate banks granted fewer commercial real estate loans overall than in the previous year. According to that New business report from JLL the commitment volume at the twelve banks analyzed was EUR 38.8 billion. That is two percent less than in 2021. In the previous year, the credit institutions had recorded growth in new business of eight percent.

“In the current situation, many market participants are holding back. The uncertain developments in the economy and interest rates are still responsible for this,” explains Helge Scheunemann, Head of Research JLL Germany. “Only when the relevant factors stabilize, foreseeable, would transactions and thus lending revive.”

7 out of 12 banks granted fewer loans than in the previous year

Only commercial real estate financing in Germany was taken into account in the analysis of new business. In addition to loans for commercial real estate, this also includes residential real estate financing for commercial purposes. Both domestic and foreign financing were used to examine banks’ loan portfolios (see below).

Seven of the twelve banks granted fewer loans in 2022 than in 2021. The decline was most pronounced at Landesbank Baden-Württemberg (LBBW) at three billion euros (minus 42 percent). On the other hand, five banks also recorded an increase in new business, including Landesbank Hessen-Thüringen (Helaba) with growth from EUR 1.2 billion to EUR 4.0 billion (up 43 percent) and Bayern LB with a plus of 1 .3 billion euros to six billion euros (plus 28 percent). The most active real estate financier in 2022 was again DZ Hyp, which achieved a new business volume of EUR 7.8 billion (minus five percent).

“Banks are currently picking the raisins”

The negative trend could continue this year. Seven banks expect a further decline in new business. Only two banks expect an increase in the volume of transactions compared to 2022 and Hamburger Commercial Bank (HCOB) expects new business in 2023 to be at a similar level to the previous year. Neither DZ Hyp nor Helaba issued a forecast for 2023 due to the current difficult market situation.

“The banks are currently picking out the raisins and continue to act in an extremely risk-sensitive manner. Project developers in particular are feeling the effects of this, as they increasingly have to turn to alternative lenders in order to obtain financing,” says Timo Wagner, responsible for Debt Advisory at JLL Germany. Overall, however, there is sufficient liquidity on the market: “We are far from a credit crunch, but the price for liquidity is relatively high,” emphasizes Wagner.

Loan stocks continue to grow

In contrast to new business, the positive development in loan portfolios remains intact. With a total of 289.9 billion euros, the volume of the previous year was exceeded by five percent. At eleven out of twelve credit institutions, the respective loan portfolios increased year-on-year, only at HCOB the portfolio decreased slightly by two percent.

As in the case of the granting of new business, Bayern LB shows the largest increase in loan portfolios. With an increase of EUR 2.4 billion, it is just ahead of Helaba, whose volume increased by EUR 2 billion to a total of EUR 38.8 billion. This makes Helaba the second largest real estate financier in the country after DZ Hyp (42.7 billion euros).

Rise in interest rates raises concerns about credit risk

In addition to the figures on new business and loan portfolios, which are requested at regular intervals, the banks were also asked about the risk of default and the volume of inquiries. When asked which factors currently have the greatest influence on the risk of default, a clear picture can be seen: the majority of banks see the economic development related to the rise in interest rates as the greatest risk. In addition, three financial institutions consider the loss of value of secured objects as a risk for a loan default.

For seven of the banks surveyed, the credit default risk has not changed over the course of the past year. Only two banks perceive an increased risk of a loan default in the current market environment. Three institutes did not provide any information on the development of the default risk.

Less demand for real estate loans

The development of the loan request volume shows a uniform picture in the office, residential, retail and logistics industry asset classes surveyed. The volume of inquiries has decreased at the majority of banks. Inquiries for office properties fell at five banks and remained constant at two institutions. The volume of credit requests increased for only one participant.

In the case of residential real estate, the volume has shrunk at six institutes. Two banks recorded an increase here. A similar picture emerges for the retail asset class. There was a negative development at seven banks and only one institute surveyed reported an increase in demand. A more balanced picture emerges for logistics and industrial real estate. Three banks remained in 2022 at the same level as in the previous year. There was a decrease in only four credit institutions and an increase in volume at one credit institution.

“The market for real estate financing remains challenging. However, there are first signs that new business for commercial loans has recovered slightly in the first quarter of 2023, Scheunemann concludes. However, as long as the price expectations of buyers and sellers do not come together, the demand for financing will remain weak,” concludes Scheunemann.

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