BF.Quartalsbarometer Q1-2024: Sentiment Brightening Slightly for Second Consecutive Quarter

• Sentiment index for real estate lenders climbs from -17.98 to -16.88 points
• Growing number of panel participants reporting increase in new lendings
• Modest decline in margins and loan-to-value ratios

Stuttgart, 4 March 2024 – The modest upward trend of the BF.Quartalsbarometer score has so far been sustained during the opening quarter of 2024. The sentiment index for real estate lenders climbed from -17.98 points during the previous quarter to -16.88 points at the last count. It therefore marks the second, if modest, increase in a row after the all-time low of
-20.22 points that was measured during the third quarter of 2023.

The barometer score was boosted by the fact that a growing number of panel participants reported a stable or recently increasing volume of new lendings (a total of 17.4 percent of the respondents, +8.8 percentage points). On top of that, terms of financing are more frequently labelled stagnant or better (21.7 percent, +10.3 pp) and less frequently described as yet-more restrictive (76.1 percent, -12.5 pp). However, the persistently strained situation of the global economy and the latest cases of insolvencies in the real estate industry have put a damper on the experts’ optimism.

“We have also noted in our day-to-day business that new lendings have slightly gathered momentum within the bracket of ten to 50 million euros and—as far as use classes go—in the residential sector,” commented Fabio Carrozza, Managing Director of BF.real estate finance GmbH, a subsidiary of BF.direkt AG. “Our general feeling is that sentiment in the real estate financing market has brightened somewhat, albeit coming from a previously bleak outlook. Although the crisis is far from over, lenders and borrowers, too, are adjusting to the still difficult market conditions, and are coping better with them than they used to.”

“Remarkably, sentiment among the real estate lenders is brightening without being vindicated by any change in the interest environment so far. The European Central Bank has not yet lowered its key lending rate, while the ten-year interest swap rate, which is a good indicator for the trend in ten-year real estate financing, has actually been climbing since the start of the year. But there is hope that the inflation will keep slowing down, and that the ECB will lower its rates in the course of the year, which could breathe life into the real estate sector,” added Professor Dr Steffen Sebastian, tenured chair of real estate financing at the International Real Estate Business School (IREBS) and scientific adviser of BF.Quartalsbarometer.

Factors with a negative impact on the barometer score include additional liquidity costs, among others. Stable or recently increased costs were reported by 55.0 percent of the respondents, which is 6.6 pp more than the previous quarter. “This trend probably reflects the increased market risk that banks are currently exposed to,” as Carrozza explained.

Although the long-term development of margins is pointing upward, it suffered a minor set-back during the previous quarter. In inventory financing, the average margin across all use classes is currently at 247 basis points (Q4 2023: 262 bps), while in project development financing, it equals 338 bps (Q4 2023: 360 bps). The loan-to-value ratios (LTV) in both inventory and property development financing continued their long-term downtrend. The loan-to-value ratio in inventory financing dropped slightly by 1.6 percentage points to 61.0 percent whereas the loan-to-cost ratio in property development financing decreased by 2.2 pp to 67.6 percent.

During the latest Quartalsbarometer survey, lenders were asked for their assessment of those whole-loan and mezzanine-loan providers who accepted high funding risks roughly until mid-year 2022. The responses given by the majority of experts suggest that alternative financiers should brace themselves for impairments. The main reasons for saying so include deteriorating market conditions, overly optimistic LTV ratios granted in the past, and the necessity to adjust mortgage lending values to the current market situation.

About the Methodology

The BF.Quartalsbarometer is compiled on behalf of BF.direkt AG, a specialist for real estate finance, by analytics firm bulwiengesa AG. The index provides a comprehensive picture of the sentiment and business climate among real estate lenders in Germany.

For the survey underlying the BF.Quartalsbarometer, a total of about 110 experts are polled four times a year, all of whom are directly responsible for approving loans to real estate companies. The panel is staffed with representatives of diverse banks and other types of financiers. The BF.Quartalsbarometer score is compiled from diverse questionnaire components: the assessment of changes in the terms of financing, the trend in new lendings, the amount of loan tranches granted, the risk tolerance of lenders by asset class, the level of LTV/LTC ratios, the development of margins, the importance of alternative funding options, and the trend in liquidity costs.

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