A) German CRE lending vs UK B) European Debt Funds C) Case … · 2017-10-13 · Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux A) ANALYSIS OF GERMAN AND UK LENDING

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


WRAP UP:

SUMMARY SLIDES FOR THE UK

LENDING MARKET

6



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.



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



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



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



PROPERTY LENDING ATTRACTIVE

WITH LOW RISK LTV RATIOS

11

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Headline 1

Headline 2 Key takeaways:

▪ Sdfdfsdfsdfsdfs sfddsfdfs

dfsdfsdfsdfs dfsdfsdfs fdsdfsdfs

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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


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



LESS THAN 20< EXPOSURE TO ONE

INDIVIDUAL CITY

14

So

urc

es: IR

EB

S

Mix of new business by cities



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.



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



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.



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.



LINK TO THE FULL 2016 REPORT:

WWW.GERMAN-DEBT-PROJECT.DE

19

You also find a link to the

DeMontfort research


COMPARISON OF THE

UK AND GERMAN

LENDING MARKETS

20


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



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



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



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



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



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.



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.



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.



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



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.



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



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



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



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



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%



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


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.



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



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.



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



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



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



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.



… 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



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?



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


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


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A) German CRE lending vs UK B) European Debt Funds C) Case … · 2017-10-13 · Markus Hesse, MBA, CEFA / Prof. Dr. Tobias Just / Dr. Nicole Lux A) ANALYSIS OF GERMAN AND UK LENDING

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