BF.Quartalsbarometer Q4 2023: Modest Year-End Recovery

• Sentiment index for real estate lenders climbs from -20.22 to -17.98 points
• Margins in inventory financing and project development financing keep going up
• Nine out of ten experts are aware of tightened terms of financing

Stuttgart, 5 December 2023 – In Q4 2023, the BF.Quartalsbarometer improved slightly to -17.98 points after bottoming out at an all-time trough of ‑20.22 points the previous month. Reasons for the modest recovery include, on the one hand, the fact that additional liquidity costs are increasingly perceived as stagnant rather than as rising. On the other hand, the gap between the margins for inventory financing and for property development financing has narrowed. The average margin for inventory financing now equals 262.3 basis points (Q2 2023: 220.5 bps) while that for project development financing equals 359.8 bps (Q3 2023: 306.6 bps).

Francesco Fedele, the CEO of BF.direkt AG, commented: “The current quarterly barometer score reflects the gradually brightening sentiment that I have been noticing in the market. The drop in inflation back down to 3.2 percent, for instance, has inspired optimism. In addition, the ten-year interest rate swap has recently fallen below three percent. This is good news for the real estate industry.” Professor Dr. Steffen Sebastian, tenured chair of real estate financing at the International Real Estate Business School (IREBS) of the University of Regensburg and scientific advisor of the BF.Quartalsbarometer, added: “The majority of market players are expecting interest rates to go down. It is also reasonable to predict that interest rates for variable financing will become more affordable than fixed long-term interest rates. This will prompt a degree of normalisation despite the market environment remaining difficult.”

Meanwhile, the loan-to-value ratios of inventory financing and property development financing, respectively, followed divergent trends. The loan-to-cost ratio in development financing increased by a moderate 1.2 percentage points to 69.8 percent whereas the loan-to-value ratio in inventory financing decreased by 1.6 percentage points to 62.6 percent. However, the long-term trend of either ratio is pointing downward.

The percentage of financing experts who report more restrictive terms on the financing market has gone up to 88.6 percent, an increase by 8.2 percentage points quarter-over-quarter. Reasons quoted by survey respondents include elevated interest rates, the heightened risk level, the low transaction volume and the general market situation.

The assessment of experts in regard to the trend in new lendings did not experience major spikes or dips in the course of the year. More than half of the participants noted that the new lendings business is stagnating. In reply to the question where survey respondents currently place their focus in new lendings, the answers risk minimisation (30.3 percent), maintaining existing client accounts (23.6 percent) and maximising returns (19.1 percent) continued to top the list. Loan decisions are influenced primarily by risk departments. Only a small minority of experts stated that the new lending division plays a key role in the loan approval process.

When asked which property types are currently eligible for financing, respondents suggested that clear trends in regard to property developments have emerged over the past three years. Sven Carstensen, Member of the Management Board of bulwiengesa AG, said: “What these figures tell you, for example, is that housing construction financing in the property development business is more or less stalled. Only half of the polled experts still had loans of this type on their books.” Back in the first quarter of 2020, virtually all survey respondents had financed existing office real estate, according to their own statements. Today, only 71 percent of them say as much. In the case of office development financing, the share dropped from 87 down to 60 percent.

In answer to the question why actual loan requests had not been approved, the dominant reason quoted was the borrowers’ insufficient equity contributions. But the significance of other reasons for loan refusals is growing, among them high risk, absence of a track record and poor credit ratings of borrowers.

During the latest poll for Quartalsbarometer, lenders were asked about the options available to a property developer or property asset holder when exiting an existing financing arrangement. The background being that a growing number of facility agreements that were signed during the low-interest cycle will expire in the near future. Some respondents gravitated toward the options of selling-as-is or refinancing, with the eventual decision strongly dependent on the anticipated return on investment in the case of a disposal or on the capital servicing capacity in the case of refinancing. One alternative among others that was identified is a loan rollover with the same bank but subject to a drastically smaller financing volume. Whenever the assets are of high quality and come with a plausible ESG transformation plan as well as adequate equity, banks and other lending institutions remain willing to finance.

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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