The recent escalation in the Middle East could have a noticeable impact on commercial real estate financing in Germany. It can be assumed that the pressure will arise less from rising key interest rates and more from higher risk premiums, stricter credit standards and a decline in banks’ risk appetite. This is the conclusion of PTXRE’s current white paper “Geopolitics & Commercial Real Estate Finance: Transmission Channels, Credit Parameters and Scenarios”.
The conflict comes up against an already tense financing environment with stricter credit standards as well as structurally increased regulatory requirements and refinancing costs. The analysis shows that a geopolitical shock in this environment does not act in isolation, but reinforces existing restrictions.
Risk premiums instead of key interest rates as a key driver
A key finding of the white paper is that rising financing costs do not necessarily result from higher key interest rates. Rather, several factors are at work at the same time – including rising bank margins, higher capital market yields and generally more cautious lending.
“The effect of geopolitical risks does not unfold linearly via interest rates, but via a bundle of adjustments in the credit process – from pricing to covenants to banks’ risk appetite,” says Andreas Trumpp, Head of Market Intelligence & Foresight at PTXRE.
Scenarios and effects
In the most likely scenario of a prolonged conflict of several months, much more restrictive credit conditions are to be expected: rising margins, falling loan-to-value ratios and stricter requirements for capital servicing capacity and collateral.
In the event of an increasingly unlikely short-term escalation followed by a calming down, on the other hand, the effects would probably be limited: transactions would be temporarily delayed, credit availability would essentially remain intact, and margin adjustments would be moderate.
In a stress scenario with additional financial market distortion, the situation could worsen significantly: lending would be concentrated on a few first-class properties, while refinancing would become the central risk and large parts of the market would be effectively cut off from access to debt capital.
Increasing polarization of the financing landscape
The effects vary depending on the asset class and affect individual segments much more than others: While core properties with stable cash flows and a solid capital base remain financially viable on the investor side, secondary and value-add properties are coming under much greater pressure. The same applies to so-called transitional assets, i.e. properties in need of repositioning, letting or modernization, which are already confronted with challenges in the current environment.
“We do not see a nationwide credit crunch, but an increasing differentiation of the market. Capital remains available – but much more selective and risk-oriented,” says Sascha Baran, Managing Director and responsible for Debt & Structured Finance at PTXRE.
In addition to riskier portfolios, refinancing cases and projects with high CapEx requirements are particularly affected. In this case, access to debt capital can deteriorate significantly or temporarily disappear altogether.
Refinancing pressure and need for strategic action
Since a large proportion of commercial real estate financing in Germany has a fixed interest rate over the long term, external shocks have a delayed effect – especially in refinancing and transactions. At the same time, market activity is expected to slow down, as many players are initially waiting.
The analysis provides a clear impetus for market participants to act: financing portfolios should be systematically checked for vulnerabilities, especially with regard to maturities, covenant leeway and fixed interest rates.
“Those who prepare for refinancing at an early stage and actively manage their financing structure gain a decisive advantage in a more selective market environment,” says Baran.
