BF.Quartalsbarometer Q3 2024: Optimism grows despite tougher German financing climate

The latest BF.Quartalsbarometer reveals that sentiment among real estate lenders is improving, despite challenging financing conditions. The index climbed for the fourth consecutive time, rising from -15.30 points in the second quarter to -13.79 points in Q3 2024. While still in negative territory, this represents a notable improvement from the Q3 2023 low of -20.22 points, though far from its peak of +8.11 in early 2015.

“Although the barometer score remains negative, we are seeing a clear upward trend. The resurgence in new lendings, larger lending volumes, and stabilization in liquidity costs have all contributed to a brighter outlook. Narrowing spreads also signal diminishing risks,” said Fabio Carrozza, Managing Director of BF.real estate finance GmbH.

Professor Dr. Steffen Sebastian, an expert in real estate finance at the International Real Estate Business School (IREBS) and a scientific adviser to the BF.Quartalsbarometer, acknowledged the mixed picture. “The barometer score has improved, even though most participants view financing conditions as more restrictive than before. The market is difficult, but lenders are adapting well. We are seeing stagnation with slight upward momentum.”

Indeed, 72.7 percent of experts surveyed described the current financing environment as even more restrictive than in Q2, up by 5.3 percentage points. No respondents saw improvement. Reasons for this include weak transaction activity, high construction costs, and cautious risk appetites within the finance sector. However, the sentiment was buoyed by a slight increase in new lendings, with 21.2 percent of respondents reporting stable or growing lending volumes.

One significant change noted was in the size of loans. Larger loans, in the €50-100 million range, were reported by 18.8 percent of participants, up 7.6 percentage points. Meanwhile, smaller loans below €10 million became less common, falling by 8.3 percentage points to 40.6 percent.

Despite the cautious outlook, margins in real estate financing saw some decline. The average margin in inventory financing fell to 217 basis points (bps), down from 246 bps in the previous quarter, while project development financing dropped to 312 bps from 336 bps. Loan-to-value ratios showed mixed results, with the ratio for inventory financing dipping by 3 percentage points to 58 percent, while the loan-to-cost ratio for development projects edged up slightly to 67.3 percent.

One positive trend was the flattening of additional liquidity costs. A significant 72.4 percent of respondents noted no increase in these costs, while only 13.8 percent expected further rises.

Residential real estate continues to dominate as the preferred asset class for lenders, with 84.8 percent of respondents focusing on this sector. In contrast, the appetite for office real estate financing has significantly decreased. Only 63.6 percent of lenders now prioritize office property financing, down from 92.3 percent two years ago. Office development loans saw an even sharper decline, with interest falling to 39.4 percent from 81.8 percent in 2022. Conversely, financing for hotel projects is gaining traction, with 48.5 percent of respondents willing to finance hotel portfolios and 42.4 percent open to backing new hotel developments.

While the market remains challenging, the gradual improvement in sentiment and lending activity suggests a cautious optimism among real estate lenders.