Enlarge image
What's going on in the real estate business?
Berlin
skyline
Photo: Dirk Sattler / IMAGO
For a long time, things were going fantastically for the financial service provider Hypoport, which earns its money with construction financing, among other things.
Between 2012 and 2021, sales climbed from 88 million to 446 million euros, most recently there was a profit of almost 31 million euros on the balance sheet.
Founder and CEO
Ronald Slabke
(49) made it into the ranks of German billionaires thanks to his success.
Until he shocked his investors and the German financial world with a profit warning last week: The annual targets would be "clearly missed".
The slump in the private real estate financing business was so severe that Hypoport canceled the growth forecasts for the current year that had only recently been confirmed - and in view of the high degree of uncertainty, Slabke did not even dare to make a new forecast.
The shares of the company listed on the SDAX collapsed by almost 40 percent by Friday.
The shares continued to fall on Monday and were now only 75 euros, around a year earlier it was eight times as much.
The price has since recovered somewhat.
But since the crash there has been unrest in the market, and the anxious question remains in large parts of the financial world: What is brewing on the real estate market there?
In times of low interest rates, the real estate market experienced a sustained boom that was not even stopped by the Corona upheaval.
For years, the business for real estate and construction financing only developed upwards.
According to a study by management consultancy PwC, the volume of building loans at German banks and savings banks last year rose to around EUR 1.49 trillion from EUR 1.39 trillion in the previous year.
That was the highest value since the survey began in 2003. "Construction financing is thus consolidating its position as the largest and fastest growing credit category for German financial institutions," said PwC at the time.
Together with the ING subsidiary Interhyp, Hypoport plays a central role - the two platforms broker a large part of the new financing in Germany.
The greater the shock now.
Hypoport felt little of the impending crisis until mid-2022.
Inflation and interest rate policy were not yet a defining factor for homebuyers, and consumer behavior is still not very restrictive.
In the first half of 2022, the financial service provider's sales even rose by 23 percent to EUR 262.5 million and profits by 35 percent to EUR 22.5 million.
At the beginning of August, CEO Slabke stuck to the annual targets and forecast sales of 500 to 540 million euros and an operating profit (EBIT) of 51 to 58 million euros for 2022.
But in the late summer weeks, the mood on the market has apparently turned.
A decline in business in the late summer months is actually normal.
The mortgage lending industry has what is known as a "summer slump" because people go on vacation and don't buy new apartments or houses.
Only business – unlike usual – did not pick up again in September.
The purchase transactions remained meager.
Slabke's people are leading the macroeconomic mix.
"This year, despite a significant expansion of the real estate supply and a slight drop in real estate prices, consumers were reluctant due to the combination of sharp rises in interest rates, extreme inflation and fears of recession, as well as hopes that real estate prices would fall more sharply," explains a company spokesman when asked by manager magazin.
That would mean: Sellers and buyers are currently spying on each other - and thus bringing the business to a standstill.
While sellers, after years of increases in value, are not yet ready to sell their properties at a lower price, buyers are speculating that the price will fall – both parties are therefore unable to agree on a new price level.
Interest rate policy causes fears for the future for financial service providers
Another factor: the rising interest rates are depressing the demand for construction financing.
With interest of currently 3.42 percent for ten-year loans, there is now a significantly higher monthly burden for mortgage lending, which is often several hundred euros.
Other market participants are also currently viewing this as worrying.
"It has become more difficult for many people in Germany to afford residential real estate," warns Hypoport's rival Interhyp when asked by manager magazin.
"We currently see no signs that this situation will change in the near future."
According to a spokeswoman for the company, "the environment for the German real estate market has changed significantly at the moment".
As a result, customers would have to recalculate and make compromises when buying real estate.
"Some decide against a purchase for the time being. They wait and see how the situation will develop."
These patterns would have different effects within Germany and also within the mortgage lending industry.
"The market as a whole is very volatile and develops differently, for example from a regional perspective," says the spokeswoman.
The company does not want to comment on developments at Hypoport.
Real estate prices already significantly overvalued in 2021
Of course, the crash did not come as a complete surprise.
In its current Financial Stability Report 2021, the Bundesbank already wrote that negative developments on the German residential real estate market would increase further in 2022, since prices continued to rise sharply during the pandemic and grew faster than private household incomes or rents.
"The existing price exaggerations in residential real estate tended to increase further," according to the Bundesbank.
According to estimates by the institution, these were between 10 and 30 percent in Germany in 2020.
Accordingly, lenders had already significantly overestimated the value of loan collateral months ago.
At the same time, the granting of housing loans had increased dynamically:
Relative to German gross domestic product (GDP), housing loans to private households have risen noticeably in recent years.
These tendencies were also reflected in the Bundesbank's most recent "Bank Lending Survey".
The major situation was also clear at Hypoport.
"Both we and various other market participants were aware that there would be a decline in the market for private real estate financing," said a spokesman for the company when asked by manager magazin.
"We have therefore already informed the capital market and the public about an expected decline in market activity with our half-year results."
The company was nevertheless surprised by the intensity of the decline in the second half of the year.
The lifeline could now be the refinancing of existing real estate loans, an area that accounts for around 25 percent of Hypoport's business.
However, new construction, which accounts for around 15 percent of the platform volume, will continue to decline.
"In addition to the above-mentioned uncertainties, high construction prices and shortages of materials are also a burden here," it says.
The decisive question is now when potential sellers and buyers of existing properties have agreed on a new and presumably somewhat lower property price.
"Since we could not determine this point in time for the current 2022 financial year with sufficient certainty, we felt compelled to suspend the annual forecast."
Slabke himself does not believe that it will happen quickly.
"Far too few families took advantage of the interim low in interest rates in August to buy their own four walls," he wrote on Twitter last week.
"But the sellers slept too. The fall in prices for existing properties was only 0.6 percent. It's a shame."
For buyers to be hesitant, the rise in interest rates of almost 1 percent in recent weeks would have to be reflected in a price reduction of 4 to 6 percent.
"We won't see that one again this year as sellers are speculating on higher prices thanks to inflation."
Two million apartments are still needed
In the medium and long term, the Slabke group continues to believe in the business.
The need for living space in Germany will continue to exist due to immigration, higher life expectancy and more single households, as well as permanent home office regulations.
Most studies assume a need for around two million additional apartments.
"The desire for their own property is therefore unbroken for many young people and families, which strengthens the demand for real estate financing," the spokesman is convinced.
Hypoport denies that the market could only pick up again if the European Central Bank (ECB) started expanding the money supply again.
"From a historical perspective, there is demonstrably only a subordinate and mostly short-term connection between the expansion of the money supply, interest rate reductions and the volume of real estate financing in Germany," said the spokesman.
Rather, private events such as starting a family or changing jobs are essential for the decision to purchase a property.
"For our operational business, we are therefore assuming that with a reduction in consumer uncertainty, our market for private real estate financing will return to the level it has been stable for decades."
Association is pessimistic about new buildings
The main association of the German construction industry is not quite so optimistic - at least as far as financing for new buildings is concerned.
The association sees rather gloomy times ahead for the industry.
"Residential construction is suffering from the increased cost of building materials and rising interest rates. It is becoming increasingly apparent that projects that have been started are being continued, but further new construction projects are being postponed because the current costs exceed the investors' budgets originally planned," says Managing Director
Tim-Oliver Müller
.
In the case of private individuals, there are also rising living costs, which would make the decision for a new building project increasingly difficult.
"So if the number of construction projects falls, that naturally also depresses the need for financing."
Müller fears that the sobering housing construction balance of only 293,000 completed apartments in 2021 will continue this year and probably also in the coming year.
"Even if we were able to build far more," he says, adding: "Politicians must therefore react and counteract this trend."
Investors and construction companies need planning security again through a reliable subsidy framework in order to absorb the cost gap and boost the market.
"The back and forth of the past few months and the repeated short-term adjustment of subsidies is poison for every investor."
The financial supervisory authority Bafin shows that the supervisors are also taking the developments seriously.
It would have regulatory responsibility if there were a threat of stability problems in the real estate market.
And it is already trying to intervene in the market.
As early as April 1, 2022, the supervisors had ordered a so-called "sectoral systemic risk buffer" of two percent for risk positions of loans secured by residential real estate after the German Bundesbank had published its analysis of the significant overvaluations.
In future, Bafin will make a certain amount of money available to credit institutions, groups of institutions and financial holding companies should they experience financial difficulties due to the current situation in the near future.
The risk buffer was approved without hesitation – neither the ECB nor the European Systemic Risk Board (ESRB) raised any objections.
A spokesman explains that the Bafin now wants to use scenario analyzes to examine the risks of falling real estate prices.
"Using this analysis, we determine whether further supervisory action needs to be taken to slow the current financial services crash."
Hypoport boss Slabke is currently trying to spread confidence on Twitter.
"With inflation expected to total 25 to 35 percent and immigration of 2 to 3 million people in the next 5 years - who is seriously speculating on falling real estate prices in German metropolises?"
His investors can only hope the market doesn't surprise him again.