Slight rise in loan commitments
Berlin, August 23, 2023
- New loan commitments by vdp member institutions remain at low level, but rising slightly in the trend
The institutions which together make up the Association of German Pfandbrief Banks (vdp) look back on subdued new real estate financing activity in the second quarter of 2023. Between April and June of this year they gave commitments for residential and commercial real estate loans totaling EUR 28.2 billion, which represents a drop of 38.2% year on year (Q2 2022: EUR 45.6 billion). Compared with the immediately previous quarter, however, new loan commitments were up by 10.2% (Q1 2023: EUR 25.6 billion).
“We may have reached the low point in real estate financing.”
“The total of all loan commitments in residential and commercial real estate financing rose slightly for the second consecutive quarter,” the vdp’s Chief Executive Jens Tolckmitt pointed out. “This could be an indication that we may have reached the low point in real estate financing. However, the recovery path ahead will be one involving many small steps, and may possibly continue until 2024. Investors and private borrowers alike still need time to grow accustomed to the increase in interest rate levels. The financing business will not be able to gain momentum until the transactions market really picks up again.”
New business in commercial real estate financing grows quarter on quarter
The individual asset classes in the vdp member banks’ real estate financing business developed differently. Whereas the volume of new business in residential real estate financing contracted by 9.2% quarter on quarter to EUR 14.8 billion (Q1 2023: EUR 16.3 billion), new business in commercial real estate financing expanded by 44.1% to EUR 13.4 billion (Q1 2023: EUR 9.3 billion). Compared with the corresponding quarter one year earlier, both asset classes reported considerable declines, namely by 45.8% in the case of residential mortgage loans and 26.8% in the case of commercial mortgage loans (Q2 2022: EUR 27.3 billion and EUR 18.3 billion respectively). However, it has to be borne in mind here that record levels were reached in the first half of 2022, particularly in new residential mortgage lending, due to pull-forward effects in anticipation of rising interest rates.
Of the residential mortgage loan commitments issued in the second quarter of 2023 totalling EUR 14.8 billion, somewhat more than half were accounted for by the financing of single- and two-family houses (EUR 7.6 billion following EUR 7.1 billion in the first quarter of 2023). The financing of condominiums was likewise up on the quarter – rising from EUR 2.4 billion to EUR 2.9 billion – thereby accounting for around one-fifth of residential mortgage loans. By comparison, the financing of multi-family houses (with a 23.0% share) contracted from EUR 5.9 billion to EUR 3.4 billion.
In the case of commercial mortgage loans, which totalled EUR 13.4 billion in the second quarter of this year, the financing of office buildings accounted for the largest share (EUR 7.5 billion or 56.0%). Compared with the first quarter of 2023, new lending in the office property class rose considerably (Q1 2023: EUR 4.8 billion). In the quarter under review, retail buildings and hotels accounted for shares of 14.2% and 10.5% respectively. Here, financing for retail buildings was down on the first quarter of 2023 (EUR 1.9 billion as against EUR 2.3 billion), whereas loans for hotels saw an increase (EUR 1.4 billion as against EUR 0.4 billion).
“Restraint continues to characterize the residential real estate market.”
“Demand for residential real estate financing in particular remains subdued,” Tolckmitt remarked. He explained that the combination of deteriorating financing conditions, an unclear funding situation and rising construction costs is hampering investment. This, he said, poses a tremendous challenge for the construction and real estate industry. “Restraint continues to characterize the residential real estate market,” he commented, adding that no clear picture has emerged in commercial real estate financing so far this year: “After a very low level of new business activity was recorded around the turn of the year, we are now seeing tentative positive signs in the second quarter,” Tolckmitt commented, referring not only to currently available loan statistics but also to increased yields and rents for commercial properties, which the vdp recently announced in its publication on the vdp index.
Although new business activity was subdued, the portfolio of real estate loans extended by vdp member institutions in the second quarter of 2023 rose slightly to EUR 1,005.1 billion (30 June 2022: EUR 987.2 billion). This is equivalent to an increase of 1.8% compared with the corresponding period one year earlier.