Commercial real estate financing – "All black swans are on the pond"

After the end of the real estate boom, several studies pointed to an impending refinancing gap in real estate and predicted the largest gap for 2026. From the point of view of the participants in the discussion, this gap is now a reality – albeit to be viewed in a differentiated way." The refinancing gap is not for top products, but it is clearly noticeable across the board," said Torsten Hollstein. The stress is particularly evident in lengthy prolongation processes and forced transactions. With a view to the market dynamics, he added: "The problem will remain with us for some time to come. The submarine will remain underwater in 2027."

At the same time, several participants emphasized that this is not a classic credit crunch. Michael Morgenroth: "Nobody finances what is lost purely in terms of value, not even credit funds. But on the basis of current market values, there is certainly plenty of capital. Just not at the conditions of the past."

Stefan Hoenen also does not see any general reluctance on the part of the banks: "There is a relatively high willingness to finance, as long as the creditworthiness of the borrower and the property quality are right." The market has become more selective, not more restrictive. Sascha Baran summed up: "We don't believe in major upheavals. The story has to fit, the asset has to be understandable, the ability to service capital has to be right."

The restraint is particularly evident in the project development segment. Market uncertainties are having an impact here today and regulatory tightening will be added in the future. Stefan Hoenen referred to the effects of Basel IV: "In the future, project developments will be treated as high-risk exposure, almost regardless of the creditworthiness of the sponsor, the location of the property or the pre-letting." The newly introduced regulatory output floor limits the reduction of risk-weighted assets determined using internal models compared to the standard approach. This would lead to higher blanket risk weights and a significantly higher capital adequacy requirement for banks. "This ties up a scarce commodity and will cause margins to rise significantly in the future." In particular, early development phases – such as land purchases without building rights – would be assessed more sharply. "The effects of Basel IV have not yet been priced in by many project developers," says Hoenen.

Sascha Baran also emphasized the need for early structuring: "Professionalism in capital structure, exit capability and planning is crucial. It is not a swan song to project development, but it must be prepared in a more stable way."

An increasingly important part of the financing landscape are alternative financiers, i.e. either credit funds that receive their capital from institutional investors or institutional investors that finance directly. Credit funds can offer higher loan-to-value ratios, often act faster than banks and are not bound by their regulations. "In general, the interest requirements of credit funds are a bit higher, simply because the return requirements of the institutional investors behind them are somewhat higher. But we do not finance any losses in value either. The assessments of credit funds and banks with regard to borrower creditworthiness and property quality do not differ significantly," says Michael Morgenroth. In his estimation, the coexistence of banks and alternative financiers will continue to develop: "There is enough space for everyone."

From the perspective of the structurer and intermediary, Sascha Baran sees more intense competition: "We are observing that new players are entering the market with exciting margin expectations that are no longer necessarily in the double digits. There is movement in the financing market."

Unlike in previous crises, German banks have so far only sold a few larger portfolios with non-performing loans (NPLs). Stefan Hoenen explains: "There is often a simple reason for this: There are definitely direct solutions with customers, and this is mainly due to the fact that the pressure is not quite as great as in the financial crisis, where the debt ratios were significantly higher."

Instead of selling non-performing loans at high discounts, many banks choose an active workout approach and rely more heavily on real estate as loan collateral. "What do banks hope to gain from this? Capital conservation through lower depreciation," said Stefan Hoenen. "But this individual approach costs time, money, effort and is a hard struggle." The participants in the discussion agreed that time is becoming a critical factor in many restructurings – especially with interest rates continuing and weak rental momentum.

The global political upheavals and also possible political risks in Germany were not seen as major risk factors for German real estate financing. Michael Morgenroth put it pointedly: "Now all the black swans are actually swimming on the pond." The risks are visible and thus priced in. At the same time, capital flows from other, more uncertain regions of the world could benefit Europe. Torsten Hollstein added: "If the capital is there, everyone can deal with risks. The decisive factor is that the money flows to Europe or to Germany - and does not flow out, as was the case three years ago."

In Stefan Hoenen's view, other factors are more relevant for banks: "Transitory risks from energy requirements and banking regulation have a greater impact on financing capacity than political headlines."

Looking ahead to 2027, Torsten Hollstein does not expect an abrupt easing, but a gradual adjustment process. Measured against the current transaction level, the existing funding volumes correspond to around two years of turnover in the commercial investment market. Accordingly, the pressure will not disappear in the short term. Only when price expectations, equity realities and financing conditions have converged sustainably and the market has successively processed the pent-up refinancing burden can the situation ease noticeably. He does not expect a quick turnaround – rather, a gradual normalization with continued selective lending.