As we finally see Europe starting to ease restrictions and get back to work, with shops and business’s beginning to reopen we must start to evaluate the potential impact on the lending and, in particular, the bridge market in Germany. It has been well reported even by the most partisan of media, that Germany has lead Europe in its response to this pandemic. The economic impact appears to be less, at this stage, than other countries, with GDP only falling 2.2% in the first quarter against neighbouring countries with a fall of 4 to 6%. The unemployment rate went from 5 to 5.8 at the end of April, again far less than other major economies, which is naturally a good indicator of the potential impact on the residential housing market.
From a micro perspective, the decision of the country’s 16 states to allow factories and building sites to stay open has resulted in the construction industry, which accounts for almost 10% of Germanies economy, expand by 1.8% in March, which during this unprecedented period is truly impressive.
As we commented last month, one of our key focuses was to monitor the regularity of borrowers repaying interest monthly and, to date, we have seen no negative impact on this side, and therefore we have not seen a decrease in the monthly payment of interest, even though it is a facility in their loan agreements.
As stated, since the start of the Covid19 events, we made the early decision to maintain a bigger cash position to accommodate investors needs for cash, the current position at time of writing, stands close to 20%
In the coming weeks, we expect approximately 70 million Euros of repayments from our borrowers, which will take liquidity to 25% and will also allow us to complete 2 or 3 new loans.
Credit Portfolio Management
From the start of this pandemic, we have also adjusted the underwriting of loans to ensure that we had additional security and lower credit risk on any new loans. This includes lowering the LTV, having personal guarantees and only lending to existing borrowers that have a proven historical track record.
In recent weeks it has become apparent from the market and our borrowers an increasing interest to take on projects, something that two months ago had slowed dramatically. This confidence from developers is a good indication that the credit risk on borrowers is reducing, and especially on our borrowers since they are coming back looking to borrow to execute new projects.
Deal flow management
We have continued to have regular conversations with all our borrowers. Many informed us that they would look to postpone any financing during March and April -as they waited to see how long the restrictions lasted and also to ensure the supply chain was still strong- now that the lockdown is slowly being eased, the developers have regained confidence and the vast majority are already requesting we start to look at the legal documents and due diligence.
In the last five weeks, we have done five loans, (which you can find the details on the website) and expect to complete new loans while giving due consideration to credit and liquidity management.
The fund’s focus on the German economy remains to be a definite advantage, thanks to the unrelenting attention of the German Government in maintaining the economy working and consumers in a healthy situation. From the last report, we have seen additional measures which are a source of further support for the corporations and consumers. Some of them are:
- Already compromised 25% of GDP in Guarantees to protect corporations and banks
- Government assistance with 6% of GDP
- Reductions in TVA to increase consumption, benefiting consumers and companies
- Unlimited Government Guarantees for loans up to 800.000 for SME’s
- Deferral of taxes, social security, and effective unemployment subsidies
- Efficient management of the Cov19 medical and confinement measures
The forecast for a post Covid19 economy 2020-2021 from the EU, foresees Germany at the forefront of the European economic recovery. With an almost full recovery of their loss of PIB of 2020 in 2021, and the lowest unemployment rate in Europe with 3,5% in 2021. This explains why the standard projections for the residential market for the year 2020 and 2021 the markets do not expect a drop in values.
While we remain cautious, it appears that the data coming out from Germany from an economic perspective as well as from health is positive. Since our last update, we have continued to talk regularly with our borrowers and also a number the larger mortgage banks in Germany, who are quite often our exit strategy, and they have reassured us that they continue to provide senior financing, albeit with a small delay due to the logistics of “sign off”.
We want to assure our investors that we are analysing the impact and implications for our market on a constant and ongoing basis.