German property industry says capital requirements risk making housing, commercial development and energy upgrades harder to finance

EU banking rules could drive up the cost of building new homes and carrying out green renovations unless forthcoming reforms protect property finance, Germany’s real estate industry has warned.

Rising capital requirements are already tying up more money at banks and risk increasing the cost of financing residential and commercial developments, according to the German Property Federation, ZIA.

The warning comes after the European Commission published a Communication on the competitiveness of Europe’s banking sector, including plans for concrete legislative proposals in the first quarter of 2027.

Property chiefs welcomed the review and the Commission’s call for a change in the culture of banking supervision, but said future rules must take account of their effect on investment.

Higher capital requirements are already tying up more bank equity and driving up the cost of project finance, according to the industry body.

Any capital released by regulatory reform should be channelled into new construction and the renovation of existing buildings, the industry body said, backed by appropriate regulatory measures.

Iris Schöberl, president of ZIA, told The European: “This Communication marks a long-overdue departure from a one-sided zero-risk culture, without losing sight of financial stability. For the real estate sector, this is an enormously important signal.

“New capital requirements cannot be considered in isolation from their real-world impact on investment.

“We see a strategic conflict of objectives here: while initiatives such as the European Housing Alliance are actively promoting urgently needed investment in housing, blanket capital surcharges are structurally driving up the cost of project financing.

“Therefore, ZIA expressly welcomes that the Commission has now firmly committed in its Communication to conduct detailed impact assessments in accordance with ‘Better Regulation’ principles prior to taking future measures.”

Among the main areas under scrutiny is the so-called ‘output floor’, which limits the extent to which banks can use their own risk models to reduce capital requirements.

Its gradual introduction is already tying up significantly more capital at banks, according to ZIA, which welcomed Commission plans for targeted proposals designed to prevent a blanket rise in the cost of real estate finance.

Another potential problem surrounds property development companies without external credit ratings. Commercial and residential projects are almost exclusively structured through special purpose vehicles, or SPVs, which typically do not carry such ratings, it added.

Under the regulatory standard approach, companies without an external rating can automatically be assigned a high-risk weight, placing them at what ZIA describes as a “systematic disadvantage”.

The Commission has now said it will examine whether the external rating requirement for these companies can be removed. Without changes, the property body fears a significant pricing shock for project finance.

Banks must already take the expiry of existing transitional arrangements into account when pricing long-term loans, meaning some financing could eventually become structurally unviable.

Permanent, targeted exemptions are therefore needed, it said.

Rules surrounding financing for the green transition are also due to be reviewed.

The Commission plans to examine the regulatory treatment of specialised and project finance used for energy-transition projects, a move the industry believes could reduce the burden on banks and help fund energy-efficient renovation of existing buildings. Alternative sources of capital will also be crucial.

The Commission has highlighted the role of investment firms in deepening European capital markets and is planning targeted adjustments to their supervisory framework.

Real estate funds and capital management companies should remain an important source of finance alongside traditional bank lending, according to the German industry.

Brussels is also reviewing overlapping macroprudential capital buffers and restrictions on liquidity held by banks operating across borders.

The Commission estimates that reducing those restrictions could free up as much as €230bn in liquid assets.

Local and regional banks are another focus because of their role in providing finance to small and medium-sized businesses.

Proportionate supervision is needed to preserve those local financing relationships for mid-sized property companies, the federation said.

Schöberl said: “The European Commission is right to systematically review how regulation affects real estate financing.

“The gradual increase of the output floor, combined with strict requirements for ADC (Acquisition, Development, and Construction) financing, is tying up significantly more bank equity.

“These higher regulatory costs are making urgently needed new construction projects noticeably harder to realize.

“We therefore expressly support the clarification that banking reporting obligations must not result in duplicate ESG data requests for real estate companies.”

Industry leaders also fear that practical changes to banking supervision could become caught up in wider institutional negotiations over issues such as further integration of the Banking Union.

They want the necessary supervisory reforms implemented independently of what could prove much longer-running institutional discussions.The German Property Federation, which represents about 37,000 companies across the real estate value chain through its members, including more than 30 affiliated associations, will now take part in the consultation process under way in Brussels.

Schöberl added: “Europe faces enormous investment challenges, from building new housing to achieving a climate-neutral transformation of the existing building stock.

“ZIA will bring its full expertise to bear in helping to shape a supervisory framework that is investment-friendly, competitive, and risk-appropriate.”

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