New Business Report Real Estate Financing

The Real estate lending for all types of properties remains selective, with the reduction in deposit rates by central banks providing slight relief in the debt markets. As the interest rate reduction course is expected to continue well into 2025, this should have a supportive effect on the real estate investment market. Loan extensions continue to dominate banks' new business activities and often require margin increases, higher repayment requirements, or additional equity contributions, depending on the asset class. In new business, financiers continue to focus on low-risk asset classes such as logistics and residential real estate, which can only partially replace the office asset class that dominated in previous years. Data centers, hotels, and retail properties are also benefiting from this development. The development in the office real estate market is twofold: liquidity is concentrated on properties in very good locations with long-term secured cash flows and good ESG ratings, and drops sharply for all other areas of the office market. This gap is increasingly being filled by debt funds, which have gained importance in recent years. On the liability side of bank balance sheets, it is evident that banks are increasingly dealing more actively with non-performing loans and are also occasionally bringing NPL portfolios to the market, without the volume of these properties having a significant impact on purchase prices so far.

New business lending still declining

For a quantitative evaluation of the situation for commercial real estate financing in the German financing market, JLL considers and analyzes planned figures for new business lending and loan portfolios in addition to the actually realized new business figures.

Commercial real estate financing includes not only financing for commercially used properties but also financing for residential properties used for investment purposes. The figures on new business and loan portfolios provided by selected credit institutions form the basis of the evaluation. These come from reports of the participating banks and thus enable a comparative analysis. The analysis of contracted new business focuses on the lending business in Germany. The loan portfolios presented and described, on the other hand, show the total volumes of the respective credit institutions. Alternative measures for raising capital, such as capital increases or bond issues, are not considered in this report.

As of mid-2024, the surveyed credit institutions reported a new business volume totaling 13.2 billion euros. In the previous year, it was still 14 billion euros. Thus, the negative trend in real estate lending continues, although at 6 percent, this decline is rather small, and only six of the twelve banks surveyed still show a year-on-year decline. The half-year development before that showed a decrease of 25 percent. At least four participating institutions were able to increase their new business volume in Germany. HELABA recorded the most significant percentage increase at 67 percent, followed by Münchener Hypothekenbank with 40 percent. Hamburg Commercial Bank and Aareal Bank confirmed their half-year results from the previous year. Six banks recorded a decline. Deutsche Pfandbriefbank was 600 million euros behind the previous year's result with new business of 0.7 billion euros in the first half of 2024. Berliner Sparkasse lost 38 percent year-on-year with new business of 0.5 billion euros in the first half of 2024. The largest new business volume in the first six months of 2024 was reported by LBBW/Berlin Hyp with four billion. DZ Hyp follows with 2.9 billion.

In assessing the expected annual result for 2024 compared to the previous year, the expectations of the participating credit institutions are balanced. Four banks each assume that they will achieve higher new business in the full year 2024 than in the previous year. Four institutions assume the same level. Another four banks expect a decline compared to 2023.

Loan portfolios slightly decreasing

The loan portfolios of the surveyed credit institutions are also slightly decreasing. As of June 30, 2024, the participating banks reported a loan volume of 295 billion euros. In the previous year, the total loan portfolio was 298.2 billion. The largest loan portfolio was held by LBBW/Berlin Hyp with a volume of 56.3 billion euros domestically and abroad. This was followed by DZ Hyp with 43.2 billion and HELABA with 35.6 billion euros. Overall, six banks reduced their loan portfolio year-on-year. HELABA recorded the largest decline with 2.8 billion euros. LBBW/Berlin Hyp lost 1.4 billion euros. Münchener Hypothekenbank kept its loan portfolio constant at 15.5 billion euros. Five banks were able to increase their loan portfolio. Deutsche Hypo – Nord/LB Real Estate Finance increased by 1.1 billion to 16.3 billion euros. Aareal Bank increased its volume by 500 million to 32.2 billion euros.

General conditions and outlook

The tense situation in the real estate market of recent years is gradually easing. After three quarters in 2024, the investment market is slightly above the previous year's volume at 23.4 billion euros. For the full year, an increase of about six billion is expected compared to the previous year. The European Central Bank's key interest rate, which has fallen by 1.1 percent since September 2023 to 3.4 percent in October 2024, will also have a positive effect on transaction activity and thus on the granting of new loans. Credit institutions will play a crucial role, especially in the coming years. Currently, the allocation rate of climate-related financing for real estate is significantly below the required quota to efficiently advance Net-Zero-Carbon goals. It is also a fact that ESG factors are becoming increasingly important in the valuation of real estate and thus significantly influence their value. High-quality, low-emission properties are therefore the focus, not only for investors but also for lenders. However, lenders need better and more comprehensive information on the respective assets to improve risk assessment and strategic planning. In this way, banks can play a decisive role in decarbonizing the entire real estate sector.

The German Real Estate Finance Index (DIFI) also shows a positive development in the financing market. This index is compiled in cooperation between JLL and the Hamburg World Economic Institute and describes the current situation in the real estate financing market in Germany and the expectation of developments in the following months. In the third quarter of 2024, the DIFI climbed into positive territory for the first time since early 2022 and currently stands at 12.3 points. Both the situation indicator (10.8 points) and the expectation indicator (13.8 points) are responsible for this positive trend. The participating experts in the report view the future financing situation more positively than the current one.

In the current financing environment, conditions remain strongly dependent on the respective asset class and property profile. This market situation continues to open up opportunities for international and alternative lenders to enter the German financing landscape and gain market share, especially in the area of whole loan and mezzanine financing. The outlook for 2025 focuses on the introduction of the Basel IV standard. This is expected to lead to a significant deterioration in financing conditions for project developments. With the requirement for higher equity backing from traditional banks in this area, alternative sources of financing are likely to become even more relevant.