Stricter financing conditions for retail properties

By Richard Haimann

Due to the loss of rental income in the coronavirus pandemic, banks are tightening their conditions for financing retail properties and shopping centers or are withdrawing from business altogether. “In general, it can be assumed that financing will become reasonably more expensive in the foreseeable future as a result of the crisis,” says Gero Bergmann, Market Director at commercial real estate financier BerlinHyp. “Due to the impact of the coronavirus pandemic on the retail sector, we are currently not handing out any new loans for investments in shopping centers,” says Walter Allwicher, Head of Communications at Deutsche Pfandbriefbank.

“The closure of shops temporarily ordered by numerous governments in Europe to combat the pandemic is an additional burden on retail property, which is already under pressure due to the growing competition from e-commerce,” says Stefan Mitropoulos, real estate analyst at Landesbank Hessen-Thüringen (Helaba), the largest commercial real estate financier on the German market with a loan portfolio of more than 36 billion euros. “If banks nevertheless offer follow-up and new financing for such properties, they must compensate their risk with an adequate premium.”

Not only banks, but also investors currently rate commercial real estate as risky investment objects. This is shown by the “Real Estate Climate”, a monthly report produced by the real estate research company bulwiengesa for the real estate financier Deutsche Hypo. According to the index, which is based on a survey of 1,200 market players, the climate for retail real estate fell to 24.5 points in May, which is lower than in 2009 during the financial crisis. 

Selective financing
Banks have become cautious in financing retail real estate and shopping centers not only since the virus pushed the global economy into recession this spring. “Against the background of the ongoing structural change in the retail sector, we have been granting loans for retail real estate selectively for years and have continuously reduced our exposure,” says Deutsche Pfandbriefbank Head of Communications Allwicher. Among the properties still financed were specialist retail centers and supermarkets. “For retail properties with local supply character and inner-city locations, we are maintaining our selective approach,” says Allwicher.

In addition, global economic development already slowed down significantly in 2019 due to the trade conflicts against China and the EU fueled by US President Donald Trump. This caused many financial institutions to become generally cautious. Aareal Bank, for example, already reduced the volume of non-performing loan exposures by 40 per cent, or 800 million euros, in the second half of last year. At the same time, it reduced financing risks in Italy by 600 million euros in the fourth quarter of 2019 alone. “In the past year, we took advantage of opportunities to reduce risk positions at reasonable expense against the backdrop of changed regulation, economic slowdown and political uncertainties,” says CFO Marc Heß.

Despite the reluctance of banks, portfolio holders need not fear that they will not receive follow-up financing. However, they must be prepared for higher interest costs or equity capital contributions. In the case of pending refinancing, “depending on the risk assessment, new agreements could possibly be reached”, says Market Director Bergmann. “The risk can be countered, for example, with an increased equity requirement or higher redemption rates”. Deutsche Pfandbriefbank makes a similar statement: “We naturally want to support our customers in follow-up financing wherever possible,” says Allwicher.

No revaluations for the time being

At the same time, the banks are not interested in putting themselves and the portfolio holders in too much trouble by demanding too high additional contributions or repayment instalments. For this reason, the banks are initially refraining from revaluing retail properties and shopping centers. “The order of the day is to proceed calmly and carefully,” says Bergmann. “In our view, short-term value adjustments are not appropriate. This is why BerlinHyp has not made any adjustments so far. “In individual cases, however, long-term adjustments will not be absent,” said the Management Board. 

It is not in the interest of the banks to force the owners of retail real estate into foreclosure, says Günter Vornholz, Professor of Real Estate Economics at the EBZ Business School in Bochum. “In the current market environment, this would only result in significant losses for borrowers and lenders at the same time, because there are currently hardly any prospective buyers for retail properties and shopping centers”. Investors would only re-enter the market segment “when the pandemic is over and people can go shopping again without fear,” says Vornholz. The fact that governments have now lifted the closure of shops again is not enough to attract consumers in sufficient numbers to the shops and shopping centers. “The fear of an infection is too great for many consumers,” says Vornholz.

This is also shown by a new study by the University of Copenhagen, which compared shopping behavior in Denmark and Sweden from mid-March to early April on the basis of transaction data from 860,000 credit cards. Denmark, like most other European countries, has had shops and restaurants closed except for basic supplies. Sweden, on the other hand, has taken a special path and has refrained from imposing restrictions on retail and catering. Nevertheless, according to the study, consumer demand in both countries has fallen by a similar amount in the period under review–by 29 percent in Denmark and by 25 percent in Sweden. 

BerlinHyp board member Bergmann therefore expects a sluggish recovery in the retail sector: “Even though many shops are already open again at the moment, we believe that the effects will continue to be felt in the long term until a level similar to that before the lockdown can be reached again, since even now consumer demand is still quite restrained.”