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GERMAN DEBT PROJECTMARKUS HESSE, IREBS IMMOBILIENAKADEMIE
PROF. DR TOBIAS JUST, IREBS IMMOBILIENAKADEMIE
DR NICOLE LUX, DE MONTFORT UNIVERSITY
Supporters
Originating Lead Sponsor
A) German CRE lending vs UK
B) European Debt Funds
C) Case Study on Financials
Co-Sponsors Trade Association Sponsors
AGENDA
A) ANALYSIS OF GERMAN AND UK LENDING
MARKETS
B) DEBT FUND ANALYSIS
C) CASE STUDY OF FINANCIAL REPORTS of German
CRE monoliners
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
OVERALL EXECUTIVE SUMMARY
3
▪ Are we heading in Germany for a strongly increasing mix of loans and alternative
lendings? If the UK is the yardstick, the answer is yes. UK Debt Funds have
become more interested in putting the German CRE lending market on the agenda.
However, high competition and low margin levels make it challenging to find the right
niche. Still, the share of alternative financing is substantially lower than in the rest of
Europe and that might finally change. Besides debt funds the same is true e.g. for
insurance companies and pension funds.
▪ Not a one-way street: German lenders are strongly looking for international growth
opportunities. The Brexit had at least in H1/2017 an impact on their market share in the
UK lending market.
▪ Credit margins seem to slowly find a bottom-level in the German market. The
continuous high availability of equity leads also in H1/2017 to rather flat to slightly
declining LTVs (at least on average) – the latter fits with the full year 2016 results.
▪ Case Study: German monoliners improved their returns and capital ratios due to strict
cost and balance sheet management. Regulatory transparency needs and overall
challenges referred to digitalisation however ask for substantially increasing costs and
investments. The low risk provisioning is typical for booming markets, but does it fit with
perceived market risks?
A) ANALYSIS OF GERMAN AND UK
LENDING MARKETS
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux 5
▪ Germany is a much bigger market with a strong economy backing the
real estate market. The German debt market is 2.4 times the size of the UK
debt market, it is geographically less concentrated offering a wider range of
opportunities. At the same time the current macro-economic environment
seems to favour Germany.
▪ While the macro picture might speak in favour of Germany, the lower
margin levels speak against it. Despite higher LTVs and more regional
opportunities, margins earned on loans are generally 100bps lower in
German than in the UK.
▪ The market risk premium for the German real estate market should
indeed be lower: UK lenders have also experienced higher loan losses and
a more intense workout cycle. Origination volumes in the UK are more
volatile and are more dependent on changes in economic and property
market fundamentals,
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
EXECUTIVE SUMMARY UK MARKET
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
WRAP UP:
SUMMARY SLIDES FOR THE UK
LENDING MARKET
6
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
H1 2017 ORIGINATION VOLUMES DECLINED
24% OVER SIX MONTHS
7
Total Origination 2005 – 2017
17.6
68,3
81,5 83,9
49,8
15,1 20,6
27,5 25,4
29,9
45,2
53,7
44,5
-
20,0
40,0
60,0
80,0
100,0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 2017
UK Banks & BS German Banks Other Int Banks
N. American Banks Insurance Companies Other Non-bank Lenders
▪ The market share of new loan originations shows a sharp decline
y-o-y for all lender groups except Other Non-bank Lenders which increased
their volume by 59% in 12 months and 9% over six months.
▪ The sharpest decline was recorded for North American Banks with a 58%
drop in origination volume, followed by German Banks with 43% decline y-o-y
and 64% for six months.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
FOCUS ON REGIONAL FINANCE
LENDERS ARE DIVIDED
8
▪ Origination volume in the regions
47% of total
▪ Regional concentration in major
cities such as Birmingham,
Manchester, Leeds, Glasgow
▪ German & Other International
Banks mainly concentrated in
Central London
▪ Other Non-bank Lenders trying to
focus more in regional finance
Focus of interest
29%
65%
84%
4%
26%
49%
10%
4%
2%
16%
22%
17%
12%
28%7%
23%
10%
17%
14%
1%1%
19%
30%
9%
4%
2%0%
26%
9% 1%30%
0% 6% 12%3% 7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Central London Rest of SE Midlands/Wales
North Scotland Other
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
INCREASE IN DEVELOPMENT FINANCE
SENIOR LENDING WINS
9
▪ UK development cycle at a
turning point
▪ 23% of new business in H1
2017 was in development
finance
▪ Increasing interest in
residential development
finance
Development finance (£bn)
Oustanding mezzanine loans▪ After strong issuance of
mezzanine finance in
2014/15, total amount of
outstanding mezzanine
loans is declining
▪ Total proportion of
mezzanine finance on
outstanding loan book
1.8%
-
1.000
2.000
3.000
4.000
5.000
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Amount of mezzanine identified on outstanding loan book
Proportion of mezzanine to senior debt
0
10
20
30
40
50
Total of loan book allocated tocommercial speculative andpart pre-let development
Total of loan book allocated toresidential development for sale
Total of loan book allocated tofully pre-let commercial
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
MARGIN INCREASE IN H1 2017
AVERAGE LTV 58%
10
▪ Prime office margin at 209bps (5-year loan)
▪ Pricing still 100 – 150bps above 2007 margins
▪ Large pricing differential between prime and secondary
Margin comparison
0
50
100
150
200
250
300
350
2007
2016
H1 2017
12 year average
2017 vs 2007
0
100
200
300
400
500
600
700
800
900
1000
50%LTV
55%LTV
60%LTV
65%LTV
70%LTV
75%LTV
80%LTV
Range Average margin
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (UK FOCUS)
PROPERTY LENDING ATTRACTIVE
WITH LOW RISK LTV RATIOS
11
Key takeaways:
▪ Sdfdfsdfsdfsdfs sfddsfdfs
dfsdfsdfsdfs dfsdfsdfs fdsdfsdfs
dfsdfsdfsdfsdfs fdfsdfs
dfsdfsdfsdfs dfsdfsdfs
Headline 1
Headline 2 Key takeaways:
▪ Sdfdfsdfsdfsdfs sfddsfdfs
dfsdfsdfsdfs dfsdfsdfs fdsdfsdfs
dfsdfsdfsdfsdfs fdfsdfs
dfsdfsdfsdfs dfsdfsdfs
Lending cycle heat map ▪ All lenders are searching
for yield – driving
expansion into regions,
Europe, alternative asset
classes, higher mezzanine
LTV lending, development
finance
▪ Current LTV lending is
conservative, 55% – 60%
LTV, but property yields are
ultra low: What is going to
happen when the 60% LTV
loan becomes 80% LTV
when yields rise?
▪ Increasing specialisation of
lenders, Insurance
Companies more flexible to
react to market changes,
Other NBL specialising in
development finance
<=1% 1-2.5% 2.5 - 5%
2017 Low moderate high
interest rate/property yield 2.5-3%
lending margin 2
regional diversification 15
development diversification 67
<=1% 1-2.5% 2.5 - 5%
2007 Low moderate high
interest rate/property yield 0,7
lending margin 1
regional diversification 2
development diversification 36
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux 12
WRAP-UP:
SUMMARY SLIDES FOR THE GERMAN LENDING
MARKET
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
NEW BUSINESS REACHED IN 2016
2.3 TIMES THE 2010 LEVEL
13
▪ Growth in new business is
holding at a high level and is
well above the figure
anticipated by the institutions
in the previous year for 2016
(+6.1%).
▪ The total loan book is growing
at a similarly high, single-digit
level as it was in the previous
year (2016: 5.2%).
2010 2011 2012 2013 2014 2015 2016
New business CRE lending 30,2 45,3 59,3 67,8 70,7 96,7 105,9
Relative change (y-o-y) 49,9% 30,9% 14,3% 4,2% 36,8% 9,6%
Absolute change (y-o-y) 15,1 14,0 8,5 2,8 26,0 9,3
Share of total 47,2% 61,4% 66,2% 64,5% 62,1% 71,0% 70,7%
New business residential investment properties 33,8 28,5 30,2 37,3 43,2 39,5 44,0
Relative change (y-o-y) -15,7% 6,2% 23,3% 15,8% -8,4% 11,2%
Absolute change (y-o-y) -5,3 1,8 7,0 5,9 -3,6 4,4
Share of total 52,8% 38,6% 33,8% 35,5% 37,9% 29,0% 29,3%
Total new business 64,0 73,8 89,6 105,1 113,8 136,2 149,9
Relative change (y-o-y) 16,9% 19,5% 14,5% 8,3% 19,6% 10,1%
Absolute change (y-o-y) 9,8 15,8 15,5 8,7 22,4 13,7
New business / loan book (previous year) 16,8% 20,2% 24,6% 26,7% 31,4% 32,6%
Growth of new business (in € bn)
So
urc
es: IR
EB
S
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
LESS THAN 20< EXPOSURE TO ONE
INDIVIDUAL CITY
14
So
urc
es: IR
EB
S
Mix of new business by cities
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
MORE THAN HALF OF GERMAN LENDING IS
ON FIXED INTEREST RATE AGREEMENTS
15
So
urc
e: IR
EB
S
Mix of new business by interest rate agreements
(in € bn)
▪ A relatively large share of new business
remains based on fixed-rate agreements.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
THE TOTAL LOAN BOOK IS SUFFERING FROM
EXTRAORDINARY REPAYMENTS
So
urc
e: IR
EB
S
▪ Extraordinary capital repayments consumed a significant portion of the
portfolio in 2015 and 2016.
▪ Over the past two years, customers have increasingly parted company
with properties with the payment of early repayment penalties. The
situation eased somewhat in 2016, although this does not hold true for all
institutions.
▪ There is increased motivation to syndicate less new business to the
banks (to sell off some of the portfolio).
Extraordinary repayments
relative to the prior year‘s loan book
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
MARGINS UNDER PRESSURE AND DECLINING
ON AVERAGE
17
Net margins relative to average portfolio of LTVs
So
urc
es: IR
EB
S
▪ In 2017, the banks generally expect to see a further average decline in
margins of between 5 and 10 base points; this will push the margin close to
the 100 base point mark.
▪ The institutions expect there to be a sideways movement in average LTVs or
a marginal upward or downward change.
▪ The performance depends substantially on the customer portfolio and on the
appetite for new business.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
H1 TREND OF MAJOR FINANCIAL DRIVERS:
GETTING CLOSER TO A STABILIZATION OF
MARGINS
18
Ratio Life Cycle H1/07
vs. end of 2006
LTV Investment Average: 0 to 2 ppt. down
LTV Project development Average: 0 to 2 ppt. down
Gross margin Investment Average: -5 to 5 bps
Gross margin Project development Average: -5 to 5 bps
▪ On average, LTVs mostly remain flat to slightly down despite ongoing high competition
among banks. The reason remains very high availability of equity for core products.
▪ This is only about the average LTV-performance; the picture is more complex for non-
core deals and partially also for development financing.
▪ Margins for plain-vanilla deals with low leverage remain under pressure. However, they
are flattening out, on average, in respect of the total new business margin.
▪ There seems to be no major difference between investment financing and financing of
project developments.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS (GERMANY FOCUS)
LINK TO THE FULL 2016 REPORT:
WWW.GERMAN-DEBT-PROJECT.DE
19
You also find a link to the
DeMontfort research
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
COMPARISON OF THE
UK AND GERMAN
LENDING MARKETS
20
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
MIX OF TOTAL MARKET DEBT
YEAR END 2016
21
▪ The UK is a much more
diversified debt market.
▪ The majority of German debt is
typically from bank lenders.
Market mix 12/2016
Sources: IREBS (est.); DMU
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
KEY PLAYERS
– TYPE OF LENDERS IN GERMANY
22
German CRE banks by market share (excluding residential investment prop.)
▪ Credit Unions and Savings Banks with
major market shares (56%).
Landesbanken with some 15% market
share.
▪ Foreign investors with minor market
share (subsidiaries of foreign banks:
1%).
Source: vdp, Bundesbank
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
DEBT ORIGINATION GROWTH
23
▪ The German debt market has shown
strong double-digit growth in
origination over the past 6 years.
▪ In the UK, debt origination has been
more volatile and was negative in
2016 after the Brexit vote.
Origination growth p.a.
Origination share of total debt▪ Also in terms of origination % share of
total debt, the German market has
been stronger, with new origination
taking a share of 25-33%.
▪ In the UK, origination volumes were
subdued for longer after the GFC and
only reached 25-30% of total debt
over the past two years.
So
urc
es: IR
EB
S,
DM
U
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
TOTAL LOAN BOOK ANALYSIS
24
▪ The current split of the total loan book
between investment financing and
development finance in 2016 was
similar in both countries.
Investment vs Development
Investment vs Development historic▪ Germany has been experiencing
constant growth of development
finance since the GFC.
▪ In contrast the share of development
loans of the total loan book has been
declining in the UK since 2010 starting
from a high level of 14%. Most
recently 2016 shows a recovery of the
development cycle.
So
urc
es: IR
EB
S,
DM
U
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
TOTAL LOAN BOOK ANALYSIS
25
▪ While the share of loans secured by
office and retail property is similar, the
German residential loan market
consists of a large amount of PRS and
institutional investment in residential
property.
▪ In the UK, financing of industrial
property, hotels and student housing
are more common.
Loan book property type split
Loan book geographic split▪ Germany has 7 key cities where most
prime properties are located. They are
the most liquid markets, however the
share between these key locations
and secondary cities and regions is
fairly equal.
▪ The UK shows a much higher
concentration in its key market (city)
London & M25 South East. 2/3 of
loans are secured by properties in that
region.
So
urc
es: IR
EB
S,
DM
U
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
TOTAL LOAN BOOK RISK
FUNDAMENTALS
26
▪ The average LTV on lenders’ loan
books in the UK has declined
significantly and was below 60% LTV
in 2016.
▪ While the average LTV of German
loan books has also fallen, the
downward adjustment has been
moderate. Current average LTV is
above 60% (2016).
Average loan book LTV
Maturity profile (share of 2016 loan book)
▪ The German loan book shows shorter
refinancing profiles, with especially
few loans longer than 6yrs and more.
▪ Despite the typical 5yr loan profile in
the UK, the average maturity profile
shows a large amount of longer-dated
loans. These are mostly fully
amortising.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
TOTAL LOAN BOOK RISK
FUNDAMENTALS
27
▪ NPL in UK lenders’ loan books peaked
in 2013 and have been declining
since, while German NPLs were less
significant and have been steadily in
decline since the GFC.
▪ One explanation is that overall
property value decline during the GFC
was 45% in the UK and substantially
lower in Germany.
▪ Secondly, German lending value is
lower than the actual market value.
NPL as % of loan book
Loss provisioning as % of total loan book
▪ Provisioning levels reached a minimal
amount in both countries in 2016,
however the process of the
deleveraging and workout process in
the UK has been very different with
higher loss provisions.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
ORIGINATION LOAN RISK
FUNDAMENTALS
28
▪ The stronger deleveraging trend in the
UK is also visible in the average LTV
for newly originated loans.
▪ Financing above 60% LTV is more
difficult than in Germany, especially
due to UK regulations.
Average origination LTV
Average origination LTV (development) ▪ Development finance shows the same
trend, higher LTV/LTC can be
obtained in Germany.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
A) ANALYSIS OF GERMAN AND UK LENDING MARKETS
NEW LOAN PRICING
29
▪ Margins for investment loans secured
by commercial properties have been
declining in both countries
▪ However, UK pricing tends to be
100bps higher than German pricing
Gross margin (originations)
Arrangement fees▪ The German loan market is known for
very low arrangement fees, typically
ranging from 25 – 50bps.
▪ In the UK, arrangement fees are
considered an important part of the
overall income earned on a loan. They
remain fairly constant at 100bps –
120bps for a 5yr loan.
B) DEBT FUND
ANALYSISWITH SUPPORT FROM
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
EXECUTIVE SUMMARY
31
▪ Majority of debt fund capital is invested in the UK.
▪ Target LTV ratios higher than actual portfolio LTV ratio, indicating lower risk
profiles than expected.
▪ IRRs are declining, mezzanine strategies achieving 10-12% on average.
▪ Potential risk of upcoming concentration of fund
terminations/extension/refinancing.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
THE MAJORITY OF DEBT FUNDCAPITAL IS HELD IN THE UK
32
▪ The INREV debt fund universe
consists of 55 funds by 30 asset
managers, managing approx.
€30.4bn under management.
▪ In comparison, the DMU survey
contains 24 debt fund managers,
managing €16.7bn in UK assets
and €1.7bn in European assets.
▪ UK debt fund strategies are
focusing on German lending
▪ A total of 91% of UK debt fund
assets are in the UK.
UK debt funds in Europe
Target GAV by target country
38%
11%6%
12%
29%
4% Germany
France
Spain
Southern Europe (exclabove)
North & West Europe(excl above)
Eastern Europe
77%
7%
7%
9%
UK
Germany
France
US
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
WALL OF FUND TERMINATIONSFROM 2019 ONWARDS
33
▪ DMU outstanding loan books and
origination have been growing
since many funds raised capital in
2014/2015
▪ Less demand for mezzanine
finance in UK.
UK debt fund origination
Fund termination profile▪ From 2018 – 2022, there will be a
large number of fund termination
dates, which either need
extending or refinancing.
0
500
1000
1500
2000
2500
3000
0%
10%
20%
30%
40%
50%
60%
70%
0
2
4
6
8
10
12
14
16
18
2012 2013 2014 2015 2016 2017
Total book value
Origination
% mezz
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
MAJORITY OF CAPITALTARGETTING SENIOR FINANCING
34
▪ 62% of all capital (by target GAV)
is dedicated to senior financing
▪ There is a small number of mixed
strategies including senior.
Debt funds by strategy (INREV)
Mezzanine vs senior
▪ In comparison, UK debt funds
have a large amount dedicated to
senior financing.
62%
84%
26%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
INREV DMU
Mezz
Mixed
Senior
62%12%
16%
10%Senior
Subordinated:Junior+Mezzanine
Mixed:Senior+Subordinated+Preferred equityMixed: Senior+Subordinated
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
71% OF CAPITAL TARGETTINGHIGH IRR STRATEGIES
35
▪ There is an equal amount of funds
by IRR targeting senior lending
versus junior lending.
▪ Over time, target IRRs have
adjusted downwards for new
funds.
Target IRRs reported to INREV
UK debt fund margins▪ The average IRR quoted by UK
debt funds is 10-11%.
▪ Senior finance margins vary with
margins against prime property by
2.5% – 2.6% and against
secondary property by 3% –
3.6%.
0
500
1000
1500
2000
2500
3000
3500
1%-2% 3% - 4% 5% - 6% 7% - 8% 9% -10%
11% -12%
13 - 14% >15%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
Senior
Mezz
IRR
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
ACTUAL LTV RATIOS LOWERTHAN TARGET LTV RATIOS
36
▪ Following IRR strategies, targeted
LTVs also show an equal amount
between senior and junior
financing (senior up to 65% LTV)
▪ In total 51% of capital is held in
loans up to 70% LTV.
Target LTV ratios by INREV
Oustanding loan book by LTV ranges▪ 75% of loan books are held in
loans up to 70% LTV.
▪ Only 25% is held in more risky
positions above 70% LTV.
0
500
1000
1500
2000
2500
50% 55% 60% 65% 70% 75% 80%
14% 13%0
38%
0
24%
63%
0
21% 20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2016 2017
>120%
100% - <120%
85% - <100%
70% - < 85%
50-<70%
60% - <70%
50% - <60%
<50%
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
B) DEBT FUND ANALYSIS
LOAN PRICING DEBT FUNDS
HIGHEST MARGINS
37
▪ Majority of debt funds target multi-
country strategies.
▪ Loan pricing of debt funds highest
in Europe compared to bank
lenders.
Debt fund pricing vs other lenders
0
100
200
300
400
500
600
All Lenders
InsuranceCompanies
Other Non-bankLenders
Bank Lenders
24%
73%
3%
Single Country
Multi Country
Not reported
C) CASE STUDY
FINANCIALSGERMAN MONOLINERS
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
EXECUTIVE SUMMARY
39
▪ GROWTH: The market got used to continuous strong growth in new CRE
lending business. It is a challenge to keep this going at peak levels. H1
reporting suggests more heterogeneous performance by players with figures
declining slightly overall – in particular for the domestic market; although
coming from elevated levels.
▪ SHIFT IN EXPOSURE: Banks managed successfully to shift exposure from
public sector financing to higher margin mortgage loan business. However,
there is also a slowdown in the loan book for mortgage loans.
▪ IMPROVING SHORT-TERM PERFORMANCE: Banks improved on returns
and capital ratios, despite margin pressure. Operating expenses are
increasing, which has also been due recently to the expenditure on the bank
levy (“Bankenabgabe”). There is a challenging trade-off between cost savings
and needs to substantially improve IT for regulatory needs and overall
digitalization issues.
▪ MID-TERM PERFORMANCE? Peak markets lead to low-risk provisioning
and increases in returns. The challenge is to be prepared for a softening of
the sector environment and for regulatory as well as digital (structural)
changes ahead – and not to forget the “V” in LTV, which includes pricing risks.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
METHODOLOGY – CASE STUDY
40
▪ This is a different perspective in comparison to the German Debt Project
analysis – it only looks at data in the public domain for the full
international portfolio of German CRE monoliners.
▪ The goal of this research is to find additional food for thought for the GDP
research by taking a different and additional perspective.
▪ This means, in particular, in the context of financial performance.
▪ The peer group is small and statistically not necessarily significant.
Therefore, it is rather to understand as a case study.
▪ Aggregated figures are mostly indexed to 2010 performance (to 100)
Aareal Bank Berlin Hyp Deutsche Hypo pbb (only partially
taken into account)
DG Hyp
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
BREAK-TIME FOR DOMESTIC GROWTH?
EVEN MORE SO LOOKING ABROAD?
41
▪ While growth rates in H1/2017 for
the total international portfolio
remain heterogeneous, the strong
growth performance is not set to
continue, on average at least.
Growth of new business
(domestic and international)
Share of international business▪ Banks remain eager to increase
the international share of the
portfolio.
▪ However, it remains a challenge
to substantially speed up
international growth.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
CLAIMS AGAINST CUSTOMERS IS A DECISIVE
FACTOR FOR PROFITABILITY
42
Claims against customers: Mortgage loans (loan book)
▪ Claims against customers are the major source of income; it
remains difficult for banks to get this performance driver up.
Despite strong
new business
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
NET INTEREST AND COMMISSION INCOME
STARTING TO DECLINE
43
▪ Despite margin pressure, the
banks in this case study were
able to increase net interest and
commission income seven years
in a row.
▪ At least some players are facing a
decline in H1/2017.
Net interest and commission income
Cost-income-ratio (CIR)
▪ Regulatory challenges as well as
the need to invest in a digital
business model will finally lead to
higher costs.
▪ A view on the chart begs the
question whether the expenses
from 2011 to 2014 were rather too
low.
7 years in a row up
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
OTHER OPERATING EXPENSES AHEAD?
DECLINING RISK PROVISIONING MARGIN
44
▪ Profitability benefits cost discipline
and operating leverage based on
high levels of new business.
General operating expenses relative to income
Risk provisioning divided by
net interest and commission income ▪ While the market discusses rising
risks due to more challenging
portfolio mix effects and high
property price levels, the risk
provisioning relative to top-line
income has been steadily
declining. This is risky at potential
peak market levels.
Lower risk provisioning ratio
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
ALL AT THE SAME TIME: STRONG INCREASE IN
THE SHARE OF MORTGAGE LOANS …
45
▪ The asset portfolio is much more
clearly positioned relative to real
estate loans than before the
crisis.
Shift in assets
Shift in liabilities▪ The financing portfolio has
become more diversified over the
years. The share of equity has
increased.
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
… THIS HAS AN IMPACT ON THE EARNINGS
PROFILE OF BANKS
46
This was also a driver for competition
▪ Shifting from low-margin to higher
margin business; this effect is
coming to an end.
A different business
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
RISK PROVISIONING AS A LEVER TO
PROFITABILITY
47
Margin remains substantially dependent on
risk provisioning
▪ Low level of risk
provisioning in booming
markets
▪ At the same time,
increasing market risks
related to elevated real
estate pricing?
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
C) CASE STUDY FINANCIAL REPORTS OF GERMAN CRE MONOLINERS
CRE BANKS HAVE STUBSTANTIALLY
STREAMLINED THEIR BALANCE SHEETS
48
▪ The total assets declined
substantially after the crisis.
Streamlining of the portfolios
Equity ratios
▪ The equity ratios benefited from
portfolio streamlining.
RÉSUMÉ
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
RÉSUMÉ: BUILDING THE RIGHT PORTFOLIO
MIX AND BUSINESS MODEL IS A CHALLENGE
50
▪ While alternative lenders are focusing on opportunities in Germany,
German lenders have a much greater appetite to finance abroad. Can this be
reconciled?
▪ It is too easy to just take the margin gap between Germany and the UK
into account. Adjusting the margin gap to reflect risk remains a challenge.
▪ The squeeze on margins in Germany is no longer in free fall, at least,
while margins in the UK are also coming under pressure.
▪ Regulatory requirements for transparency as well as digitalization creates a
need for adjustments of business models in all countries. Instead of
focusing on saving costs to improve returns and capital ratios, there seems to
be an additional key question on the agenda: whether banks spend sufficient
amounts of OPEX and CAPEX in order to adjust their business models.
▪ Unfortunately, this might end in a conflict of interest with profitability and
returns (and therefore finally also with capital ratios) in the short term.
▪ In the medium term, at least, this will be a key competitive factor
between banks but also compared to domestic and international alternative
lenders
Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux
ARE YOU INTERESTED IN REAL ESTATE
FINANCE EXECUTIVE EDUCATION?
51
More seminars on e.g. real estate cash flow modelling or real estate risk
management:
https://www.irebs-immobilienakademie.de/immobilienseminare/