Research

New Business Report Real Estate Financing

Full Year 2023

June 06, 2024
New business figures and loan portfolios for commercial real estate financing by German banks

The year 2023 proved to be very challenging for the German economy. Gross domestic product decreased by 0.3 per cent, mainly due to the weakening global economy, combined with a challenging situation in the energy market and the effects of the European Central Bank’s restricted monetary policy. The declining inflation rate over the course of the year helped to ease some of the pressure on the German economy, by falling to 3.7 per cent in December 2023, a decrease of five percentage points since the beginning of the year.

These macroeconomic factors also had a significant effect on the real estate sector, with the ECB's ongoing restrictive monetary policy impacting negatively on the sector in a variety of ways. On the one hand, these stricter debt capital modalities discouraged investment activities while on the other, the construction industry faced major challenges due to the increasing number of project developers running into difficulties as a result of the rise in interest rates. This is because calculations made in the past for new developments do not apply in the current market climate. The market was also dominated by issues such as the return to the office and the potential conversion of vacant office space to residential use. It is also evident that ESG-compliant properties are increasingly becoming the focus of market participants.

The property investment market will bottom out in 2023

A total of €31.7 billion was invested in property in Germany in 2023, the lowest level in 12 years. This trend was already apparent by mid-2023 and continued into this year due to the lack of a year-end rally. It was a slump of 52 per cent year-on-year. The decline is correspondingly clear when comparing the average value of the past ten years (-58 per cent). The slump in investments in office property was representative of the development of the market as a whole. This former favourite of investors generated just €5.2 billion in the past year. With a share of around 17 per cent of the total volume, office property currently ranks just fourth in the comparison of real estate segments. Residential assets (Living) were the most sought-after real estate segment for investors in 2023, with around €9 billion flowing into this use type, representing a share of 29 per cent. This was followed by investments in logistic and industrial properties (€7.3 billion) and retail investments (€5.5 billion). There was also a significant decline in major transactions across all real estate segments. Just three deals broke the one billion Euro threshold. As many as 49 transactions had a purchase price in the three-digit million range; however, this is a significant decrease when compared to 2022, during which there were 121 such deals.

The investment market in the Big 7 was also gloomy. In Germany’s real estate strongholds, the volume of capital invested reduced by 60 per cent to €12.8 billion. This is primarily explained by the weakening office investment market. At the end of 2023, with 85 per cent of the invested capital channelled into Core and Core-Plus properties, it was clear that market participants are acting more selectively and favouring particularly low-risk investments.

Lenders are much more selective when granting loans. The current business activity is primarily supported by the prolongation of existing loans. Secure cash flows in particular had a positive impact on the evaluation of debt servicing capacity. Lending continues to focus on low-risk use types such as logistic and residential properties and it is still evident that banks are increasingly trying to sell off risky assets. This trend is also underlined by the potential €900 million portfolio sale by PBB and Blackstone. It remains to be seen to what extent this will be an incentive for other banks and financing institutions to dispose of less well-performing portfolios. The pressure on liquidity, which has already had a tremendous impact on project developers, is now affecting portfolio holders. In this case, the ECB's anticipated interest rate cut in June should provide some relief to the tense situation.

Significant decline in new business volume

To quantitatively assess the situation for commercial real estate in the German financing market, JLL does not just analyse and evaluate the current new business figures achieved by the participating banks and financing institutions, but also the projected figures for new business and loan portfolios.

Commercial property financing includes financing for commercially used properties and residential properties used as investment vehicles. The analysis is based on the volumes of new business and loan portfolios submitted by selected banks and financing institutions. This data was specifically identified in the reports published by the participating banks and financing institutions, enabling JLL to conduct a comparative analysis. The figures analysed for contracted new business relate to lending in Germany. In contrast, the loan portfolios described include the debt capital volumes in Germany and abroad. Measures to raise capital such as capital increases or bond issues are excluded from this market analysis.

The selected banks and financing institutions surveyed recorded a total new business volume of €31.1 billion in 2023, a fall of 21 per cent compared to the previous year. This negative trend was already apparent by the mid-point of 2023, with a decline of 25 per cent. Only DekaBank was able to increase its volume of new business compared to the previous year (in this case by a total of €100 million). All other selected banks and financing institutions reported a decline. This was most pronounced for Helaba, which saw its volume of new business fall by €2.1 billion year-on-year to €1.9 billion in 2023. LBBW recorded the highest volume of new business last year by providing loans of €7.9 billion, thanks in part to the takeover of Berlin Hyp. In 2022, however, it recorded a new business volume of €9.1 billion. However, risk provisioning is increasing and banks and financing institutions are setting aside more capital for potential difficulties.

The outlook for the participating banks and financing institutions in FY 2024 is balanced. Compared to 2023, three institutions expect the volume of new business to increase, while six expect new business to stabilise at roughly the same level as last year. A further three institutions are anticipating a decline in new business activity.

Loan portfolios remain at a steady level

Unlike the volume of new business, loan portfolios experienced a slight increase of one per cent. The loan portfolio volumes of the participating banks and financing institutions (referring to both German and foreign business) totalled around €297 billion by 31 December 2023. Seven institutions were able to increase their loan portfolios, with Aareal Bank reporting the most significant increase at the end of the year, adding €2 billion to its books. However, five institutions recorded losses compared to the previous year, the largest of which (€2.1 billion) was borne by Helaba. As a result of the Berlin Hyp takeover, LBBW reported the largest loan portfolio by 31 December 2023 of €56.4 billion, followed by DZ Hyp with €42.9 billion and Helaba with €36.7 billion.

Alongside the reported volumes of new business and loan portfolios, our most recent survey also asked questions about the current lending process.

Firstly, we asked which sustainability certificates are essential components in the lending process. The energy (performance) certificate was cited as ‘very important’ by the vast majority. DGNB, BREEAM and LEED certificates were categorised as ‘important’ by most of the banks and financing institutions questioned. For DekaBank, these environmental certificates are also very important in the lending process. 

When asked about the current length of the average fixed-interest period for commercial property loans, a clear picture emerges. While the majority of the banks and financing institutions surveyed grant property loans with an average fixed-interest period of three to five years, just two banks reported an average fixed-interest period of five to ten years.

General conditions and outlook

Conditions in the property market appear to be improving somewhat in 2024. An increasing number of market participants are abandoning their wait-and-see attitude and are once again participating actively in the investment market. The main reason for this is that the ECB is maintaining interest rates at their current level. Although the period of low interest rates is over for the time being, the current stable level provides market participants with a certain degree of planning certainty for future investment strategies. Unfortunately, this turnaround in the property investment market was still not apparent at the end of the first quarter of 2024. Although the expectations of sellers and buyers are converging, the number of deals being concluded remains low. The €6.3 billion recorded in the first three months of 2024 was 19 per cent lower than in the corresponding quarter in 2023. However, a significant increase in transactions is anticipated in the coming quarters, with an annual volume of around €40 billion currently being targeted.

The current status of the German Property Financing Index (DIFI) also suggests that the situation in the financing market is improving. This index, compiled by JLL and the Hamburg Institute of International Economics, outlines the prevailing situation in the real estate financing market and shows expectations for the coming months. Although the index remains in negative territory at -12.8 points, a steady rise has been observed since the fourth quarter of 2022 (-69.7 points). Moreover, the coming months in the financing market are viewed much more positively than in the second half of last year.

As margins have now stabilised at a higher level due to reduced liquidity, some borrowers are considering international lenders alongside the more traditional domestic sources of debt capital. The latter have been able to significantly expand their market share in recent months, but are clearly focusing on low-risk exposures. Development financing, for example, is only considered after planning law has been clarified and/or planning permission has been granted. Other winners in the current property financing market are local cooperative banks and savings banks, which are filling the capital gap of small to medium-sized deals.

Contact us

Our Debt Advisory contacts:

Debt Advisory:
Timo Wagner, Team Leader Debt Advisory Germany

Research:
Helge Scheunemann, Head of Research Germany

 

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