Student housing and co-living also increased in popularity, while hotels and boarding houses drop slightly. Losses were also recorded in retail, shopping centres and the logistics sector. The office and residential sectors are also considered safe havens when it comes to financing project developments.
Both asset classes are financed by 100 percent of the capital providers. Student housing, hotels and the retail segment recorded slight losses. Property developers and land see slight growth.
The willingness to finance land has increased significantly. In this way, the financer secures the possibility of earlier entry into the project. This ensures a higher variance in projects and opportunities.
FAP’s mezzanine survey – consisting of 53 of the current 146 investors active lenders –depicts an agile, flexible and stable market for subordinated financing in Germany.
Interest rates, loan-to-capital ratios, capital tranches
Interest rates on subordinated loans are coming under increasing pressure. The spread of interest rates is expanding.
The interest rates achieved in 2019 are between 5 and 14 percent (previous year: 7-10 percent) per annum for portfolio financing, as well as between 10 and 15 percent (previous year: 8 to 15 percent) for project developments. Although, with that, the average interest rate level of the previous year has still been reached, the pressure on margins, however, has noticeably increased recently, especially at the lower end. The most noticeable pressure on margins is with premium properties or developments.
Approximately 80 percent of offerors now provide capital for portfolio properties of up to an LTV of 90 – 95 percent. A constantly high proportion of investors are prepared to accompany very high loan-to-value ratios, provided that the property, location, real estate investor, business plan and exit by sale or refinancing are conclusive.
In project developments, the clear majority (80 percent) of providers finance between 90 percent and 95 percent of the total investment costs (TIC).
Depending on the strategy and risk tolerance of the provider, loan to capital ratios (LTC) of up to 100 percent will continue to be supported. Against the background of further increases in property prices, capital providers must be prepared to consistently take over higher risks with respect to their lending limits (LTV), in order to be able to realise deals. Regular durations in portfolio and project development financing tend to extend to up to three years.
Financers had to become more flexible again
Against the background of market developments (margin pressure, price increases, availability), investors had to become even more flexible. Thus, the proportion of financers, who in the past only realised project developments and now also finance portfolio developments has risen. 64 percent of the providers (previous year 54 percent) now finance in both areas.
The prevailing pressure on margins in project development is also affecting financers, resulting in an increased “blending ratio” with existing properties, primarily due to liquidity and security considerations.
Major cities in demand (again)
A significant change can be observed in location preference. Particularly due to new, mostly institutional providers, there has been a significant increase in those who finance only TOP 7 or metropolitan locations compared to the previous year. 43 percent (previous year 7 percent) of the providers concentrate exclusively on TOP 7 locations. At such a location, B and C areas or peripheral locations adjacent to the metropolises (“commuter belts”) are also financed by experienced providers, if they are attractive (connections, infrastructure, price structure).
This is particularly due to the increased involvement of institutional investors as well as the shortage of suitable properties. Individual providers also switch to C-regions (surrounding areas) on the basis of regional or installed know-how, provided that the attractiveness of the project and the quality of the developer are assessed positively. Only 19 percent (previous year 55 percent) operate nationwide. 74 percent finance in B-regions, 26 percent in C-regions.