Banks losing patience as Germany heads for an ‘L-shaped decade’

Professor Hanspeter Gondring set the tone at this year’s Real Estate Finance Day in Frankfurt in mid-November, hosted by Targa Communications. His keynote was uncompromising. Germany, he argued, is not heading for a quick rebound or even a bumpy revival but an L-shaped stagnation that could extend to the end of the decade. Productivity is weak, investment momentum is absent, and the country will face several more years of flat growth before any meaningful upturn appears.

Against that backdrop, the new findings from EY and EY-Parthenon land with particular force: the banking system has stopped behaving as if time will solve the problem.

German banks are signalling that the long phase of “wait and see” in real estate finance is ending. Two new studies from EY and EY-Parthenon point to a decisive shift: lenders no longer believe they can simply ride out the downturn. Refinancing risk has overtaken valuation concerns as the system’s primary pressure point, and banks are preparing for a more interventionist and less forgiving phase in credit management.

For investors, the message is blunt. German lenders are not distressed, but they are markedly more selective. Projects without strong sponsors, realistic business plans or rapid demonstrable improvement are unlikely to receive the benefit of the doubt. The EY Credit Market Study 2025, which covers ALL bank lending, makes the pivot explicit: credit risks are rising, the economic outlook remains weak, and institutions expect more loan defaults. Yet the same banks report stable profitability and a solid refinancing base, a combination that encourages firmness rather than generosity.

Only 65% of real estate financiers still expect positive market development by 2030, down sharply from 80% a few months earlier. Ten percent now foresee a sustained negative trend. The optimism that briefly surfaced mid-year has evaporated and many lenders privately concede that any broad recovery has slipped several years into the future.

Where the risk is now concentrated

The EY-Parthenon Real Estate Bank Survey for Q3 2025, covering 58 specialist lenders and two dozen restructuring law firms, is unequivocal. Project developments face the greatest strain. Sixty-one percent of respondents expect insolvencies in developments to rise over the coming twelve months, a threefold increase in a single quarter. Construction costs remain inflated, sales exits are unreliable, and banks are reluctant to roll forward facilities that lack visible repayment pathways.

Offices remain firmly in the danger zone. Around half of banks expect further price declines and virtually none expect price growth. Lenders attribute high refinancing risk to the entire segment, with secondary and decentralised locations singled out as the weakest. User behaviour continues to shift and consolidation remains widespread. Banks have little appetite for underwriting half-empty or energy-inefficient stock without credible capex planning.

Retail sentiment has also darkened. In September 2024, 60% of respondents still expected stable prices. Now 48% anticipate declines and 52% expect prices to remain constant. Positive expectations have vanished. Grocery-anchored stock remains the exception, but discretionary retail is monitored closely, particularly where conversion costs are high or footfall is weak.

Hotels, after a period of stabilisation, are again considered vulnerable heading into 2026, with 64% of respondents expecting elevated refinancing risk. Logistics is a relative bright spot, although lenders remain cautious about aggressive leverage or speculative development.

Residential remains the systemic buffer, but the insulation is imperfect. EY surveys show rising refinancing risk among private residential borrowers, with the proportion of banks rating this risk as high rising from 12% to 29% in one quarter. This remains manageable but signals pockets of strain that require monitoring.

Restructuring grows tougher as patience runs thin

Banks’ treatment of distressed borrowers is undergoing a marked shift. Traditional forbearance still dominates the initial response. Term extensions, amortisation adjustments and temporary deferrals remain routine tools. However, lenders increasingly recognise that these measures only delay the recognition of problems when the underlying business case has not improved.

The Q3 EY-Parthenon survey shows the previously dominant “amend and extend” approach falling from 90% to 74% quarter-on-quarter. More forceful measures are gaining ground. Fifty-two percent of lenders now cite insolvency and sale as a realistic path, while 42% point to private sales with debt write-downs. Roughly a third of respondents report increased activity in NPL transactions.

This represents a turning point. Time is no longer assumed to heal weak assets. Banks, still profitable and under no external pressure to transact, are more willing to push through restructuring outcomes that recapitalise assets sustainably. For investors with capital and operational capacity, this is the phase where genuine price discovery begins.

Lending conditions reflect this new discipline. More than half of banks have tightened credit standards in the past six months. In the office segment, nearly 90% have done so. LTVs are lower, collateral requirements are higher and equity contributions have increased. Margins are stable to slightly rising but are being eroded by higher risk costs and regulatory capital consumption. Banks will still finance core assets, strong sponsors and credible decarbonisation strategies, but the hurdle for support is materially higher than a year ago.

What this means for institutional investors

Equity investors should prepare for stricter leverage, more conservative underwriting and longer due diligence cycles. Assets requiring heavy repositioning, especially older offices and non-essential retail, will meet more resistance in bank credit committees. Price discovery will be driven less by sentiment and more by refinancing events.

Debt and mezzanine investors are entering a stronger phase. EY’s findings confirm a widening space for non-bank capital in recapitalisations, structured refinancings and the early stages of NPL trading. Banks are not distressed sellers, but they are willing to offload risk where outcomes look lengthy or uncertain.

Timing remains critical. Few lenders expect meaningful relief before late 2026 and several foresee no genuine market recovery before 2027 or beyond. Investors preparing deployment strategies should assume a prolonged period of sideways movement, greater lender selectivity and more forced solutions.

REFIRE: German banks remain stable. They are operating - more or less - from a position of confidence and discipline. With stable refinancing, acceptable profitability and rising regulatory expectations, they have little incentive to rescue weak borrowers or extend credit to projects that no longer hold up.

The next phase of the cycle will be shaped less by ECB policy and more by how banks allocate their constrained risk budgets. Their patience is fading. For well-prepared investors, this is the moment to watch the refinancing pipeline closely and be ready when lenders decide they have waited long enough.