How is the financing of real estate projects changing because of the pandemic?

March 22, 2021

Uncertainty increases, risks become more difficult to calculate: the longer the pandemic lasts, the more individual sectors of the commercial real estate markets are under pressure. What impact does this unclear situation have on the financing of real estate projects?

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“How much longer?“— a question bothering financiers too.

“Flight to quality”

Quite some market observers already see the specter of the 2008 financial crisis raising its head again, but Dr. Thomas Beyerle, Head of Research at Catella Germany, puts things in order: “We expect non-performing loans ... to increase significantly; however, lending banks have improved their asset quality considerably, built larger capital buffers and strengthened their liquidity positions.” He confirms a trend that Martin Rodeck, Managing Director of EDGE Germany, illustratively calls “flight into quality”: banks are now financing core buildings again on largely stable terms, but the capital costs for opportunistic properties and project developments are rising much more sharply.

Shift of emphasis in project financing

This means that project developers need to take action, because the heyday of low interest rates for everyone is over. Developers of residential properties continue to have hardly any problems, while hotel projects meet with a rather lukewarm response. For example, many projects now have to be backed by more equity capital than before the crisis, but also guarantees or high pre-letting rates can have a positive effect on financial backers’ risk assessments, says Sascha Klaus, Chairman of Berlin Hyp’s Board of Management.

On the other hand, the (partial) withdrawal of banks from project financing is giving way to competitors. Who could that be?

Dr. Michael Munsch, Board Member of Creditreform Rating, expects “... a shift from bank financing to the capital market.” However, capital market financing is not a cheap solution: “Premiums for risks are viewed differently there, and the pressure on property valuations is increasing,” Munsch points out.

Subordinate financing such as mezzanine and private bonds can also fill the financing gap caused by the increasing restraint of banks. This is where institutional investors such as insurances, pension funds, family offices and credit funds come in, with both liquidity and investment needs, Michael Seeberg, Managing Director of Hypcloud, has observed. They can act more flexibly, as they are not subject to the same regulatory framework as banks.

Digitalization—the pandemic as an accelerant

The pandemic is acting as an accelerant here as well: the need for contactless processes means a significant tailwind for digitalization, which until then had needed to catch up in the real estate industry. And there are enough steps in this direction: “In recent years, many FinTechs have developed software and online platforms with the aim of simplifying and accelerating processes entirely without direct physical contact,” Seeberg specifies.

In the private sector space, online platforms have established themselves in the form of crowd-investing in the last few years. And with some tailwind from the pandemic, offerings for institutional investors could follow, allowing project developers and capital providers to share information transparently in a secure data space. The future starts now!

Stephanie von Keudell

Independent journalist