BF.Quartalsbarometer Q3 2024: Sentiment Brightening Despite Bleaker Financing Conditions

• Sentiment index for real estate lenders climbs from -15.30 to -13.79 points
• More panel participants report growth in new lendings
• Margins see a modest decline to 217 bps in inventory financing and to 312 bps in development financing
• Banks more reluctant to finance office real estate while increasingly ready to grant loans for hotel developments

Stuttgart, 9 September 2024 – The BF.Quartalsbarometer saw its score rise for the fourth consecutive time. The sentiment index for real estate lenders ascended to -13.79 points during the third quarter of 2024, up from -15.30 the previous quarter. In Q3 2023, the BF.Quartalsbarometer had reached a trough of -20.22, a far cry from its historic peak score of +8.11 of Q1 2015.
“While the barometer score remains deep in the negative range, we are obviously seeing an upward trend. With new lendings resurgent, lending volumes larger and the rise in liquidity costs checked, sentiment has brightened. Narrowing spreads also create a positive stimulus because they act as an indicator of diminishing risk,” commented Fabio Carrozza, Managing Director of BF.real estate finance GmbH, a subsidiary of BF.direkt AG.  

“It is worth noting that the barometer score has gone up although panel participants take a generally dimmer view of the financing conditions than they did in the previous quarter. All things considered, I would call it a stagnant market with slight upward tendencies. While the market environment remains difficult for lenders, they are growing ever more adept at handling it,” said Professor Dr Steffen Sebastian, tenured chair of real estate financing at the International Real Estate Business School (IREBS) and scientific adviser of BF.Quartalsbarometer.

The current situation on the financing market was considered as yet more restrictive by 72.7 percent of the polled experts, an increase by 5.3 percentage points (pp) since Q2. The remaining panel members reported unchanged conditions, none of them having noted more favourable conditions. The reasons quoted to back this verdict include a relentlessly difficult market situation with restrained transaction activities, a challenging interest environment and high construction costs. Other aspects mentioned were the risk aversion within the finance industry and the high standards applied to borrowers.

What buoyed the barometer score was the higher number of survey respondents (21.2 percent of them, +3.8 pp) who noted an unchanged or recently increased volume of new lendings (rollovers included). A total of 36.3 percent of the experts (-2.7 pp) registered an unchanged or recently decreased volume of new lendings, while 42.4 percent (-1.1 pp) perceived stagnation. Another factor coming into play is the gradual resurgence of lending volumes. For 18.8 percent (+7.6 pp) of the respondents, the average single loan size was back in a range of 50 to 100 million euros. Conversely, the range below ten million euros declined by 8.3 pp to 40.6 percent.

Average margins fell significantly. At the moment, the average margin across all use classes in inventory financing is 217 basis points (Q2 2024: 246 bps) and 312 bps (Q2 2024: 336 bps) in project development financing. Loan-to-value ratios showed a mixed performance quarter over quarter: While the loan-to-value ratio in inventory financing dropped by 3.0 pp to 58.0 percent, the loan-to-cost ratio in property development financing increased by a modest 1.1 pp to 67.3 percent.

The fact that the rise in refinancing premiums was checked helped to stimulate the barometer score. Additional liquidity costs were thought to be flatlining by 72.4 percent (+16 pp) of the respondents, to be rising by 13.8 percent (-17 pp) and to be falling by another 13.8 percent (+1 pp). 

Once again, residential real estate clearly topped the list of answers to the question which use class is prioritised in a bank’s lending policy, as it claimed 84.8 percent of the responses. This contrasts sharply with the picture two years ago: In Q3 2022, no less than 92.3 percent of the experts favoured the financing of office real estate stock, a ratio that has declined to 63.6 percent as of Q3 2024. The willingness to finance office developments took an even steeper nosedive, dropping from 81.8 to 39.4 percent. By contrast, a growing number of financial institutions are prepared to grant loans for hotel projects, with 48.5 percent financing portfolio properties (Q3 2022: 19.2 percent) and 42.4 percent bankrolling new-build developments (Q3 2022: 22.7 percent).

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 performance in new lending, 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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