Financing real estate while in economic uncertainties

Effects of the lockdown

The general conditions have changed significantly since the outbreak of the COVID-19 pandemic. We continue to operate in a low interest rate environment, but economic consequences of unknown magnitude caused by the lockdown are beginning to emerge. This has all had a strong impact on the willingness of banks to grant loans, which are currently only very selective at all. This creates, especially in the case of inquiries for value add or even opportunistic real estate investments, significantly higher risk premiums or makes long-term financing practically impossible. Investors have to switch to expensive bridge financing or face significantly increased capital requirements. In general, banks take a very careful look at lending and check each lease for potential risks within a significantly longer time frame. The liquidity surcharges, especially for higher LTV levels, can amount to several 100 bp for these tranches and ensure only a small amount of new investment activity. Necessary follow-up financing will be postponed as long as possible or only extended for a short period in the hope that lower risk premiums will be required again soon. This shifts the risk into the late summer months.

What comes next

The banks will closely monitor developments in the real estate industry, which will also occur with a time delay, as in previous cycles. The valuations of individual segments will have to be adjusted, emerging trends have picked up speed significantly with the Corona crisis - keywords: flexible jobs, online retail - and will change the industry sustainably. What is certain is that we will have to expect in the coming months higher volatility in financing conditions and that there will be significantly more restrictive conditions for the covenants. It remains to be seen to what extent this will affect prices that have risen steadily in recent years.