Members of Board of Directors speak out for Europe and strengthening of democracy

The Association of German Pfandbrief Banks (vdp) today launches a campaign to strengthen Europe and democracy. Over the next five weeks, in the run-up to the European Parliament elections on 9 June 2024, the vdp will publish 12 consecutive statements by the members of its Board of Directors to underscore the benefits of Europe and promote democracy and participation in the European elections.

The first statement, published today, is by Gero Bergmann, vdp President and Member of the BayernLB Board of Management. In his article, Bergman focuses on the central importance of promoting democratic principles and institutions to preserve peace in Europe.

In the days and weeks ahead, the vdp will release the statements by the other members of the Board of Directors in the following order: Marc Oliver Heß (Aareal Bank), Sascha Klaus (Berlin Hyp), Matthias Schellenberg (apoBank), Dr Bettina Orlopp (Commerzbank), Thomas Köntgen (pbb), Christian Bonnen (Kreissparkasse Köln), Hans-Dieter Kemler (Helaba), Sabine Barthauer (DZ HYP), Dr Holger Horn (Münchener Hypothekenbank), Dr Matthias Danne (Deka Bank) and Jens Tolckmitt (vdp).

“We are committed to democracy, to the European Union and the values it represents.” Jens Tolckmitt

The Pfandbrief Banks stand for an open and democratic Europe. They operate in many European countries, where they utilise a true export hit – the Pfandbrief.

“We are committed to democracy, to the European Union and the values it represents, such as respect, tolerance, diversity, humanity, equality, freedom of opinion and discourse,” vdp Chief Executive Tolckmitt pointed out. “That is why we are calling on people to participate in the European elections. Every vote counts.”

Tolckmitt went on to say that the numerous challenges we face today, notably the wars in Ukraine and the Middle East as well as other geopolitical risks, climate change, digitalisation and the uncertainties surrounding economic development, make this year’s European elections particularly important. “We need a strong Europe that is founded on the rule of law in order to secure peace, competitiveness, prosperity and social cohesion,” Tolckmitt emphasised.

• vdp banks profitable and robust in 2023 despite falling property prices and loan commitment activity and increase in risk provisioning
• Downward trend on the property market expected to slow down in the current year
• Pfandbriefe outstanding exceed EUR 400 billion for the first time since 2014

The credit institutions which together make up the Association of German Pfandbrief Banks (vdp) demonstrated that they were crisis-resistant in the 2023 financial year. Despite the property market downswing, which brought with it a drop in financing activity, falling property prices and, in some cases, a marked increase in risk provisioning, the vdp member banks proved themselves to be profitable and robust.

“The 2023 financial year put a strain on the entire economy. The concurrence of higher building costs, inflation, rising interest rates and the political zigzag course surrounding the heating law and support programmes presented the real estate sector in particular with major challenges,” vdp President Gero Bergmann emphasised at the beginning of the Association’s annual press conference in Frankfurt am Main today. “The vdp member banks are withstanding the numerous stress factors that have continued into the current year. They have set up extensive, appropriate provisions for risk and have coped well with this burden on earnings.” He went on to say that having considerably more capital available than in the years of the financial crisis 2008-09 has paid off, and added that the Pfandbrief banks’ business model is based on conservative risk structures and first-ranking security.

“The German office property market is considerably more resilient than is often perceived.” Gero Bergmann

Bergmann focussed primarily on the German commercial property sector, which is feeling the effect of the market downswing considerably more strongly than the residential property sector. Demand for offices in particular remained sluggish in 2023, he explained, due to uncertainties over future economic developments and the effects of the remote working trend. “The market for office properties has always been more strongly characterised by cyclical fluctuations than other asset classes. The current development in offices is therefore not overly worrying,” the vdp President said, and added: “The German office property market is considerably more resilient than is often perceived.”

Turning to the tense situation on the US property market, Bergmann pointed out that developments there cannot be applied one to one to the European property market, and called for greater differentiation. With regard to the interest rate environment, vacancy rate, duration of investment, home office working arrangements and contract conditions on the investment and user market, he said that the office property markets in the US and Europe differ substantially. He added that the US market itself is anything but homogeneous, and that differences have to be made between regions, locations and asset classes. The extent to which different market areas are affected is far from being the same all over. Ultimately, each individual property has to be considered on its own merits. What is more, he said, banks typically finance on the basis of prior-ranking security.

Development of real estate financing business

Price decline greater for commercial properties than for residential properties

The price correction that has persisted on the German property market since mid-2022 continued last year. Overall, property prices fell by 7.2% between the fourth quarter of 2022 and the fourth quarter of 2023. Prices were down by 10.0% after peaking in the second quarter of 2022.

Residential property prices fell by 6.1% compared with the fourth quarter of 2022 and by 8.4% compared with their highest level in the second quarter of 2022. Thus, they were somewhat more robust than commercial property prices, which dropped by 12.1% and 16.5% in the respective time periods.

“The future development of property prices depends largely on the actions of the ECB.” Gero Bergmann

That said, for 2024 as a whole, the vdp expects considerably weaker price declines in all asset classes year on year. The forecasts here range from 0% to -5% (residential properties), -2.5% to -7.5% (retail properties) and -5% to -10% (office properties).

”Just as the sharpness of the price declines recorded the previous year was attributable, not least, to the ECB’s key interest rate hikes, which came much too late and were then much too severe, so the future development of property prices depends largely on the actions of the ECB,” Bergmann pointed out. He went on to say that if the widely expected cut in interest rates does occur this year, it will become easier for real estate sellers and investors to find a new price equilibrium. Thus, he expects a stabilisation of prices in the coming months that should begin as early as the second half of 2024 for residential properties. On the other hand, Bergmann said that the end of the price declines for commercial properties is not expected until the end of this year at the earliest, as structural changes such as the effects of the remote working trend are delaying the recovery. “In any event, the 2024 financial year will be challenging for all property market players,” Bergmann said in summing up.

Pfandbrief banks grant property loans totalling EUR 110 billion

The Pfandbrief banks’ property financing business contracted noticeably in 2023 as a result of the market downturn and the subdued demand for real estate. Loan commitments totalled EUR 110 billion, compared with EUR 160 billion the previous year. However, half of 2022 was still characterised by the years-long upward trend on the property market and by the fact that a great many forward loans were agreed in anticipation of rising interest rates.

In 2023 the decrease in commercial property financing (-23.8%) was less than in residential property financing (-35.8%), whereby the latter had risen more strongly in the previous years from 2010 onwards. Loan commitments issued for residential properties between January and December 2023 fell to EUR 64.1 billion compared with the previous year’s result of EUR 99.8 billion, while total commercial property loan commitments decreased from EUR 60.2 billion to EUR 45.9 billion in the same period.

Among the commercial asset classes, office properties continued to account for the largest share of loan commitments, namely 50.3% (EUR 23.1 billion). These were followed by loans for retail properties totalling EUR 11.2 billion, which made up a 24.4% share. Lagging some distance behind, loan commitments for hotels accounted for EUR 4.6 billion and industrial buildings for EUR 1.1 billion.

“We expect transactions and lending activity to pick up slightly in 2024.” Gero Bergmann

“2023 was the first year to be characterised in its entirety by the downswing on the property market. This inevitably had an effect on new business done by banks providing real estate finance,” Bergmann explained. That said, the fourth quarter of 2023 saw a 5.2% rise in loan commitments compared with the corresponding quarter the previous year. The vdp President interpreted this increase as the beginning of an incipient stabilisation and predicted: “In terms of financing conditions, planning security will slowly increase again as interest rates become more stable. For this reason, we expect transactions and lending activity to pick up slightly in 2024.”

At EUR 1,004.1 billion, the portfolio of property loans extended by the vdp member banks as at 31 December 2023 was slightly above the volume recorded the previous year (31.12.2022: EUR 999.1 billion).

Current regulatory issues

vdp calls for regulatory moratorium and review of existing measures

From the Pfandbrief banks’ viewpoint, one obstacle that should not be underestimated stands in the way of a possible recovery of the financing market, namely banking regulation. The vdp’s Chief Executive Jens Tolckmitt pointed out that banks have been confronted with continuous regulatory measures since the financial crisis.

“The balance between sensible and excessive regulation was lost long ago.” Jens Tolckmitt

Basically speaking, many of the regulatory measures were undoubtedly necessary. They have also fulfilled their purpose, as the latest crises have impressively demonstrated, he emphasised. Nevertheless, the balance between sensible and excessive regulation was lost long ago: “Present-day banking regulation is working. Credit institutions are well capitalised and profitable. They demonstrated their resilience during the Corona pandemic and continue to do so in the current property market crisis.” This was also acknowledged by the regulatory authorities, he added. However, one and a half decades after the 2008 financial crisis, this realisation is not being taken as an opportunity to review existing regulation and forego further regulation. Instead, new rules are being implemented without a pause. In the meantime, Tolckmitt said, this constant bank-centric regulation is having a negative impact because it increasingly inhibits lending. One serious side-effect of this one-sided regulation, he commented, is that traditional banking business conducted by well-regulated banks is increasingly migrating to less regulated or even unregulated areas of the financial system. “Every new regulatory measure that is aimed purely at banks plays into the hands of the shadow banking sector, which is happy to pick up the business,” Tolckmitt warned. This is finally dawning on the supervisory authorities, he remarked, adding that, if this development is to be stemmed, they must finally switch fast from talking to acting.

Since it is already clear today that the capital burden for banks will continue to grow in the years ahead due, amongst other things, to the Basel III requirements, Tolckmitt made the following appeal: “After 15 years of more and more intensive regulation, the time has now come to change course. Before further measures are initiated, the current regulatory framework first needs to be examined. We need a regulatory moratorium.” This is because every single regulatory measure – whether it already exists or is added in the future – makes it more difficult for banks to perform their core task, namely to finance the real economy. “Particularly at a time when political projects of enormous dimensions – such as the sustainable transformation of the economy and the building stock as well as the creation of affordable housing – have to be financed, banks need to be enabled to do just that. They are the ones that mobilise the private capital Europe urgently needs for these ends.”

In this context, Tolckmitt again described as counter-productive the 2% systemic risk buffer that has applied to residential property financing since February 2023, arguing that it has lacked any fundamental justification since, at the latest, the market downswing began. In addition, he referred to the announcement by the US banking supervisors that they will make wide-ranging changes to the Basel III rules in response to criticism from the financial sector. “The European supervisory authorities would do well to study the Fed’s motives and look into similar easing measures. We urgently need a level playing field in the implementation of global regulatory standards,” the vdp Chief Executive remarked.

Finally, Tolckmitt criticised sustainable finance regulation for being too sweeping, complex, polyphonic and contradictory: “It is a mistake to gear ESG-relevant regulatory measures almost exclusively to the end state of climate neutrality instead of incentivising the transition to it. After the European elections we will push for the sustainable finance requirements to be scrutinised, significantly streamlined and regulation as a whole to be designed in such a way as to actually support the achievement of the political objective,” the vdp Chief Executive said.

Development of Pfandbrief business

Volume of Pfandbriefe outstanding rises to over EUR 400 billion

For five years, now, more Pfandbriefe have been issued each year than have matured. In 2023, the volume of Pfandbriefe outstanding rose again to just over EUR 400 million for the first time since 2014. Year-on-year growth amounted to 1.7% (previous year: EUR 393.5 billion).

Demand for Pfandbriefe was strong throughout the entire year on both the primary market and the secondary market. The Pfandbrief issuance volume in 2023 was, at EUR 65.7 billion, just over 20% below the sales achieved in the exceptional year of 2022 (previous year: EUR 82.3 billion). Nevertheless, it matched the level of the 2021 issuance year, which was already characterised by strong demand, and clearly surpassed the target figure of around EUR 50 billion communicated by the vdp member banks at the beginning of 2023. Whereas Public Pfandbrief sales totalling EUR 13.8 billion almost equalled the previous year’s volume (EUR 14.2 billion), the volume of Mortgage Pfandbriefe issued fell to EUR 51.9 billion (previous year: EUR 68.1 billion). With that, Mortgage Pfandbriefe accounted for a 79% share of all Pfandbriefe sold in the year under review.

“The Pfandbrief market coped well with the ECB’s withdrawal.” Jens Tolckmitt

“Pfandbrief yield growth encouraged real-money investors to step up their activities as buyers once again. The Pfandbrief market coped well with the ECB’s withdrawal,” Tolckmitt emphasised. In particular, new issues with short and medium maturities attracted greater investor interest due to the partially inverted interest rate structure. Pfandbrief investors adjusted their demand behaviour at the start of the current year as the yield curve began to return to normal: “Longer-term issues with a maturity of up to 12 years have been back in demand since the beginning of 2024,” the vdp Chief Executive reported.

Pfandbrief spreads widened by 14 basis points between January and December 2023 – an inevitable consequence of the ECB’s withdrawal. A part in this was played, on the one hand, by the turbulence surrounding Silicon Valley Bank and Credit Suisse in spring. On the other, the slowdown on the US commercial property market from autumn onwards led to a selective increase in spreads. Pfandbrief spreads thus remained noticeably below spreads on other covered bonds. Since the beginning of 2024, Pfandbrief spreads have been stable at the slightly higher level of the previous year.

Volume of sustainable Pfandbriefe outstanding up by 36%

Demand for sustainable Pfandbriefe remained high in 2023. With sales totalling EUR 8.5 billion, the level of the exceptional year of 2022 was not quite achieved in absolute terms (previous year: EUR 9.5 billion) given that the issuance volume was lower as a whole. However, their share of total sales rose once again. The volume of Green and Social Pfandbriefe outstanding increased in the year under review by around 36% to EUR 24.1 billion (previous year: EUR 17.7 billion). The number of issuers of sustainable Pfandbriefe climbed to 13 in 2023, and has risen further to 14 since the beginning of the current year. “ESG-related securities have grown steadily in importance in recent years. This trend will continue. We expect to see even more issuers of sustainable Pfandbriefe enter the market in the years to come,” Tolckmitt remarked.

vdp membership development

Three new member banks join the vdp

The vdp currently has 52 members which together represent a market share of just under 97% of total Pfandbriefe outstanding. New members in 2023 were Sparkasse Rhein-Nahe, Volksbank Freiburg and Raiffeisenlandesbank Oberösterreich. An overview of all vdp member banks is available here.

Volume of new loan commitments by vdp member banks was higher in the fourth quarter of 2023 year on year

In the 2023 business year, the banks which together make up the Association of German Pfandbrief Banks (vdp) issued loan commitments totalling EUR 110.0 billion for the construction and acquisition of residential and commercial properties (previous year: EUR 160.0 billion). This represents a decline of 31.3%. The drop in commercial property loans was, at -23.8%, less pronounced than in loans for residential properties (-35.8%).

Between January and September 2023, financing volumes increased gradually from quarter to quarter at a moderate level. In the fourth quarter, when new real estate financing activity is traditionally lowest, a volume of EUR 26.2 billion was recorded, matching the result for the first quarter of 2023. Compared with the corresponding quarter one year before, this meant an increase of 5.2% (Q4 2022: EUR 24.9 billion).

“We expect new real estate financing activity to pick up slightly in 2024.” Jens Tolckmitt

“The property market downturn in 2023 also had an impact on new loan commitments by banks providing real estate finance. The vdp member banks issued a considerably lower volume of real estate loans in 2023 than one year before. However, one should bear in mind that the first half of 2022 was still characterised by a years-long market upswing and benefitted from anticipatory effects in the shape of a large volume of forward loans. “This then had a dampening effect on business in subsequent quarters,” the vdp’s Chief Executive Jens Tolckmitt emphasised. “The fact that more real estate loans were granted in the fourth quarter of 2023 year on year indicates that financing activity is beginning to stabilise. Given that interest rates on loans appear to have peaked and planning security has increased with regard to financing conditions, we expect new real estate financing activity to pick up slightly in the current year 2024.”

New commitments in residential property financing: one- and two-family houses predominate

In the months October to December 2023, vdp member banks extended residential property loans totalling EUR 15.2 billion. This represents a decline of 11.6% compared with both the third quarter of 2023 and the fourth quarter of 2022 (Q3 2023 and Q4 2022: EUR 17.2 billion in each case).

With a total of EUR 7.2 billion, one- and two-family houses accounted for somewhat less than half of residential property loans extended in the fourth quarter of 2023. Thus, the volume was almost unchanged year on year (Q4 2022: EUR 7.3 billion). Total loans for condominiums came to EUR 2.9 billion in the fourth quarter of 2023. This represented an increase year on year (Q4 2022: EUR 2.5 billion). By contrast, the volume of loans for multi-family houses totalling EUR 4.2 billion showed a decline (Q4 2022: EUR 6.6 billion).

Considerably more commercial property loans than in the fourth quarter of 2022

New commercial property loans totalling EUR 11.0 billion were issued in the fourth quarter of 2023. Thus, loan commitment activity dropped by 20.3% compared with the immediately preceding quarter (Q3 2023: EUR 13.8 billion). At the same time, however, it exceeded by 42.9% the volume achieved in the months October to December 2022 (Q4 2022: EUR 7.7 billion).

The vdp member banks’ commercial property financing activity was again chiefly accounted for by loan commitments for office properties, which made up a 51.0% share. The volume of office property loans extended was, at EUR 5.6 billion, down on the previous quarter (Q3 2023: EUR 6.1 billion), but well above the corresponding figure one year before (Q4 2022: EUR 3.4 billion). New loan commitments for retail properties, totalling EUR 2.7 billion, were likewise down on the previous quarter of 2023 and up on the corresponding quarter one year before (Q3 2023: EUR 3.5 billion / Q4 2022: EUR 1.2 billion). New loan commitments for hotels and industrial buildings totalled EUR 1.1 billion and EUR 0.2 billion respectively in the quarter under review – levels similar to those achieved in both corresponding periods.

Amounting to EUR 1,004.1 billion, the portfolio of real estate loans extended by the vdp member banks remained stable quarter on quarter (30 September 2023: EUR 1,003.9 billion).

vdp index shows 6.1% decline in residential property prices

Price adjustments in the German property market continued in the fourth quarter of 2023. Property prices were down by an average of 7.2% compared with the final quarter of 2022, and by 2.2% versus the previous quarter of 2023. The property price index of the Association of German Pfandbrief Banks (vdp) stands at 175.2 points (base year 2010 = 100 points), which is 10.0% below its high of the second quarter of 2022 (194.8 points). The vdp index has been compiled by vdpResearch every quarter since 2010 and, unlike other property market indices, is based on an evaluation of actual property transaction data from over 700 credit institutions, providing price coverage of the entire German market for residential and commercial property quarter by quarter.

Residential property prices fell by 6.1% year on year in the fourth quarter of 2023 (Q4 2023 vs Q4 2022), and by 1.6% quarter on quarter (Q4 2023 vs Q3 2023). Compared with the peak of the second quarter of 2022, prices for residential property in Germany have fallen by a total of 8.4% after having more than doubled within the preceding twelve years.

Commercial property prices declined by 12.1% year on year, and by 4.9% quarter on quarter in the final quarter of 2023, both of which are the largest price drops ever recorded in the vdp index for commercial property. This represents a decline of 16.5% since the prices reached their high in the second quarter of 2022, following an increase of around 55% between 2010 and 2022.

“A trend reversal is not yet in sight for property prices.”
Jens Tolckmitt

“2023 was a difficult year for the property sector, as we can see from price developments. There was no sign of recovery in the fourth quarter either,” said vdp Chief Executive Jens Tolckmitt. “A trend reversal is not yet in sight for property prices, despite frequent public speculation. The situation will remain difficult for the time being in 2024.”

Residential property: rent and returns rise significantly

While residential property prices declined by a uniform 1.6% compared to the previous quarter, there were slight differences between types of property in the year-on-year comparison. Owner-occupied housing – comprising both single-family houses and flats – saw a decline of 5.8% as against the prior-year quarter, whereas multi-family property prices fell somewhat further, by 6.3%. Combined, these figures produce an overall price drop of 6.1% for residential property.

At 5.8%, the annual rates of change in rent under new contracts in multi-family properties remained unchanged from the preceding quarter. Returns surged further, by 12.9%, as measured against the vdp cap rate index, although not quite as strongly as in the third quarter of 2023 (+13.5%).

“The housing shortage will get worse.”
Jens Tolckmitt

“The trend in rents shows that housing remains in very short supply, particularly in urban areas. Given the declining number of new homes being built, we can expect the housing shortage to get even worse in the coming years, resulting in rents climbing further still. It is therefore vital that the measures resolved by the Alliance for Affordable Housing (Bündnis bezahlbarer Wohnraum) be implemented quickly – along with other action too,” said Tolckmitt.

Top 7: largest rent increase in Berlin

Residential property prices proved somewhat more resilient in the top 7 cities than in the country as a whole. Prices in Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart fell by an average 5.1% year on year, compared to the 6.1% drop at national level. The sharpest declines were in Munich and Frankfurt, at 6.3% and 6.1%, respectively, and the smallest in Cologne and Düsseldorf (4.4% and 4.8%). Quarter-on-quarter price drops ranged between 1.0% (Cologne) and 2.3% (Munich) in the fourth quarter of 2023.

Berlin saw the largest increase among the major cities, both in rent under new contracts in multi-family properties (6.7%) and in returns (12.5%), and Hamburg saw the lowest (3.3% and 9.0%). The average increase in rents in the top 7 cities was 5.4%, and in returns 11.1%.

Commercial property: retail properties see biggest plus in rents

Price corrections in the commercial property market (-12.1% year on year and -4.9% quarter on quarter) far exceeded those of the residential property market once again in the fourth quarter of 2023. This was largely attributable to developments in office property prices, which fell by 5.2% quarter on quarter and 13.3% year on year. Price drops for retail properties were somewhat less pronounced at 9.0% and 3.9%, although this segment has been experiencing a downtrend for considerably longer than the office property segment.

The increase in returns and rent under new contracts as measured against the vdp cap rate index had a stabilising effect on the market. Returns on office properties rose by 17.5% year on year in the final quarter of 2023. Office rents also increased (+1.9%), albeit not as much as in the preceding quarters.

Retail rent under new contracts recorded a year-on-year increase for the first time since the third quarter of 2019, which, at 2.5%, was also a new record. There has been no major growth in rent under new contracts for retail properties since the vdp index was launched in 2003, which can be attributed to high investor demand. Returns on retail properties also saw by far their largest increase in the history of the vdp index in the fourth quarter of 2023, of 12.7%. This broke the previous record of 9.5% from the second quarter of 2023 by a long distance.

“Muted demand is putting pressure on office property prices.”
Jens Tolckmitt

“The property crisis is affecting the commercial segment more than the residential segment. The spotlight is currently on office properties, as their returns have thus far generally failed to meet investors’ expectations. On top of this, demand for offices remains subdued due to the uncertain economic growth in Germany and the still unclear impact of the working from home trend on office space needed. So prices continue to depress. Retail properties, on the other hand, are much further along in the cycle, as evidenced by the first increase in rent under new contracts for more than four years,” said Tolckmitt.

Outlook for 2024: “No new price balance as yet”

Asked for his forecast for this year in property, Tolckmitt said, “The property market remains in a downturn as we start 2024, and prices continue to drop. It will be some time before property buyers and sellers reach a new price balance, and only then will we see a noticeable recovery in the market.”

“Downward trends will likely ease considerably as the year goes on.”
Jens Tolckmitt

According to Tolckmitt, prices can be expected to stabilise in the residential property market by the summer, but not before the end of the year in the commercial segment. “As things currently stand, 2024 can be expected to be a challenging year for the property market overall, although the downward trends that started in mid-2022 will likely ease considerably as the year goes on.” This is indicated by the stabilising interest rates, increasing returns and continued growth in rents, which are making property investments more attractive again.

Positive aspects include voluntary nature of mortgage portfolio standard and waiver of refurbishment obligation for individual residential buildings

The Association of German Pfandbrief Banks (vdp) welcomes the compromise reached in Brussels on the Energy Performance of Buildings Directive (EPBD). It particularly supports the trilogue agreement between the European Parliament, the Council of the European Union and the European Commission on mortgage portfolio standards (MPS), which will be voluntary and incentivised rather than presenting unrealistic obligations.

Mortgage portfolio standards create incentives for lenders to improve the median energy performance of the portfolio of buildings covered by their mortgages, which should in turn encourage their potential clients to refurbish their properties in line with the EU’s energy-saving and decarbonisation targets, through attractive financing products for property renovations.

“The agreement on the Energy Performance of Buildings Directive is a huge step towards achieving the European climate targets.” Sascha Kullig

“We have been against mandatory MPS from the start, because they would have made it difficult for many private customers and property owners to access loans. Banks would have been forced to favour energy-efficient buildings over lower performing properties in their lending. But the key to success is actually in making the portfolio of buildings that are not yet energy efficient as green as possible,” said vdp Management Board member Sascha Kullig. He also pointed out that banks are not the owners of the properties they finance, “The banking industry cannot force anyone to refurbish their building.” He said that the building owners should be the ones to decide to improve their energy efficiency. “The agreement on the Energy Performance of Buildings Directive is a huge step towards achieving climate targets in Europe.”

The vdp also supports the EPBD requirement that every EU Member State establish a national data register of energy certificates, comprising energy data on individual buildings as well as the national building stock. Kullig stressed the importance of this transparency and said, “It is vital that banks have access to the energy certificates for the buildings in their mortgage and investment portfolios. It is not feasible for them to finance the transformation of the building stock without comprehensive energy data.”

The vdp was critical of the insufficient harmonisation of energy certificates at European level in the compromise. “The lack of comparability of energy certificates in Europe is not only problematic with a view to regulation such as the EU taxonomy, but also makes things difficult for international banks,” said Kullig.

No refurbishment obligation for individual residential buildings

As regards improving the energy performance of residential buildings, the agreement reached by the trilogue negotiators provides for EU Member States to each set their own national trajectory to reduce the average primary energy use of residential buildings by 16% by 2030 and 20-22% by 2035. At least 55% of these reductions should be achieved through the renovation of the worst-performing buildings – which comprises 43% of all residential buildings in the EU. For non-residential buildings, the aim is to renovate the worst-performing 16% of buildings by 2030 and the worst-performing 26% by 2033. Member States will be able to exempt certain categories of residential and non-residential buildings, such as listed buildings, from these obligations.

“Obligation to refurbish non-residential buildings is not comprehensible.” Sascha Kullig

The Pfandbrief banks welcome the fact that there are no requirements at the level of individual residential buildings. Refurbishment obligations for every single residential building would have been too much to ask of households under financial strain. “Refurbishments must always be carried out on a case-by-case basis, with a view to technical feasibility, economic viability and cost efficiency, and this will be much easier to achieve with residential buildings under the newly adopted approach,” said Kullig. He cannot understand why, on the other hand, an obligation to refurbish non-residential buildings was agreed upon, “Requirements based on the condition of the building stock would have been a more suitable solution here too, to better address the different ways of improving energy performance in each individual building.” He also wonders how the large amount of fefurbishment work needed on non-residential buildings can be completed given the limited capacity of tradespeople in Europe.

Following the trilogue agreement, the compromise now requires formal adoption by the European Parliament and the Council of the European Union. The EPBD must be implemented at national level no more than 24 months after publication in the Official Journal of the European Union. In Germany this will be effected through the Buildings Energy Act (Gebäudeenergiegesetz).

• Brighter sentiment on the market for unsecured bank bonds
• Pfandbrief issues of EUR 49.5 billion planned for 2024

A slight headwind for sales of Pfandbriefe and unsecured bank bonds is expected to persist during the first half of 2024, according to the results of the survey conducted for the third time by the Association of German Pfandbrief Banks (vdp) among its members’ capital market experts.

Possible pressures for Pfandbrief business include, among other things, still subdued lending business, low demand from the ECB (ECB support), the attainable asset swap spread level and the over-subscription levels achieved. Prolonged inversion of the yield curve and a generally uncertain outlook for future interest rate trends have recently led to a strong investor preference for short and medium-term maturities. Issuance of longer-dated Pfandbriefe has rarely been possible in the past six months. At +37 points, expectations among capital market experts regarding investor demand for Pfandbriefe for the first half of 2024 are once again significantly more positive than in June 2023 (+14 points).

The results of the twice-yearly survey are published under the title “vdp Issuance Climate”. The sentiment indicator, which ranges from -100 to +100 points, continues to show slightly subdued sentiment at -22 points, with scores for Pfandbriefe (-23) and unsecured bank bonds (-21) currently reflecting very similar assessments. Compared with the June 2023 survey, Pfandbriefe scored slightly worse, while the score for unsecured bank bonds improved.

Scoring                                           December 2023    June 2023
Score for Pfandbriefe:                             -23                      -14
Score for unsecured bank bonds:          -21                      -29
Overall score:                                          -22                      -21

The vdp member institutions expect lending business to remain subdued in the coming six months (-53 points). This represents an improvement of 28 points compared with the survey conducted in summer 2023. Capital market experts are less negative with regard to the general rating trend for the banking sector than they were in June 2023 (-36 points). The corresponding score improved by twelve points to -24.

ECB expected to cut interest rates

The vast majority of institutions taking part in the survey expect two minor cuts in the key interest rate of 25 basis points each by the end of 2024, meaning a reduction in the deposit rate from the current 4% to 3.5%. Only a minority expect up to three small interest rate cuts. However, seven institutions still expect the deposit rate to rise above 4%.

Improved prospects for sales of unsecured bank bonds

The vdp member institutions expect better sales potential for unsecured bank bonds in the first half of 2024: while investor demand was rated at 0 points in June 2023, expectations for the first half of 2024 have improved to +24 points. This is probably due to the attractive yields that can be achieved and the limited supply of unsecured bank bonds.

Pfandbrief sales in 2023 exceed maturities

Pfandbriefe with a total volume of just under EUR 54 billion have been issued since the beginning of 2023. The current figure is around 30% below the volume for the whole of 2022 – mainly owing to subdued demand for property finance and corresponding cover – but nearly 10% above what vdp member institutions forecast at the start of 2023. The new issuance volume achieved to date will exceed this year’s maturities by EUR 10.5 billion. Sales of Pfandbriefe in benchmark format (at least EUR 500 million) were especially buoyant this year. With 56 issues and eleven tap issues totalling EUR 37.5 billion, this year’s volume equals the amount sold in 2020 and 2021 combined.

“Higher interest rates brought real money investors back into the order books despite the inverted yield curve and uncertainty over the future interest rate trend,” said Sascha Kullig, member of the vdp’s Management Board, summing up Pfandbrief business in 2023.

New Mortgage Pfandbriefe with a volume of EUR 41.1 billion expected in 2024

The vdp member institutions expect a new issuance volume of EUR 49.5 billion in 2024, with Mortgage Pfandbriefe accounting for EUR 41.1 billion and Public Pfandbriefe for EUR 7.9 billion of this total. At the same time, Pfandbriefe with a volume of EUR 45.0 billion will mature in the coming year. Based on these estimates, the volume of German Pfandbriefe in circulation will record net growth of EUR 4.5 billion in 2024. While a net increase of EUR 9.2 billion is expected for Mortgage Pfandbriefe, the volume of outstanding Public Pfandbriefe is likely to fall by EUR 4.7 billion. Member institutions are planning to place Green Pfandbriefe totalling EUR 5.3 billion and Social Pfandbriefe worth EUR 1.1 billion in 2024. The volume of these sustainable Pfandbriefe in circulation at the end of November 2023 amounted to EUR 24.0 billion, with thirteen institutions having placed such bonds on the market to date.

“The survey results reflect ongoing challenges on the capital and property markets, but at the same time give cause for optimism in 2024. Solid financial results and good capitalisation of our member institutions are just two reasons why Pfandbrief banks are likely to achieve successful placements of unsecured bank bonds and Pfandbriefe next year, despite ongoing difficulties,” says Kullig.

Methodology

Each survey comprises an assessment of the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation. These assessments determine separate scores for Pfandbriefe and unsecured bank bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores (maximum -100) indicate that the issuance environment is less favourable than average, and positive scores (maximum +100) that it is more favourable than average.

The vdp Issuance Climate survey provides information twice a year on the sentiment among the members of the Association of German Pfandbrief Banks (vdp) with regard to the placement of Pfandbriefe and unsecured bank bonds. To assess this sentiment, experts from the vdp member banks are asked about the factors influencing Pfandbrief and unsecured bank bond sales. Each survey covers the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation. 

The responses are grouped together by subject area, providing an overview of the supply and demand situation on the markets for Pfandbriefe and unsecured bank bonds. Three scores are then calculated based on certain assumptions about the relative importance of each subject area: one score each for Pfandbriefe and unsecured bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores indicate that the issuance environment is less favourable than average, and positive scores that it is more favourable than average. 

The Pfandbrief banks belonging to the vdp hold a market share of almost 96% of outstanding Pfandbriefe.

Around 300 guests attend vdp’s annual reception in Berlin

The Association of German Pfandbrief Banks (vdp) welcomed around 300 guests to its annual reception on Thursday evening in Berlin. Among those who attended were representatives of the German Bundestag, various ministries, the Deutsche Bundesbank, the Federal Financial Supervisory Authority (BaFin) and vdp member institutions. The keynote speech was delivered by Bundesbank President Dr Joachim Nagel.

In his welcoming address, the vdp’s President Gero Bergmann took a clear stance against the anti-Semitic incidents that have occurred in Germany recently. He appealed to the historical responsibility of Germany and of each individual: “Never again is now and in the future!”

In the course of his speech, Bergmann went on to discuss developments on the Pfandbrief market which, he said, has once again proven its efficiency and crisis resistance this year. By contrast, falling prices and subdued new financing business have presented the property market with greater challenges throughout the year now drawing to a close. “Neither prices nor the demand for credit are expected to pick up in the short term. The peak of the crisis is yet to come,” Bergmann remarked.

“After 15 years of continuous regulation, a review is overdue”

Finally, Bergmann named the regulatory measures – Basel III, capital buffers and the minimum reserve – that, in the Pfandbrief banks’ view, are currently preventing credit institutions from fulfilling their most important task: to finance the real economy and transformation. He called on policymakers and supervisory bodies to conduct a targeted review of the regulatory framework, arguing it is overdue after 15 years of continuous regulation. “What doesn’t fit needs to be scrapped or altered. That is the responsibility supervisory authorities must fulfil. Then, we banks can assume our own responsibility, which is to create stability in these times of turbulence,” Bergmann insisted.

“Considerably too early to even think about potentially lowering policy rates”

In the keynote speech that followed, Bundesbank President Dr Nagel emphasized that the banking sector has weathered the multiple challenges well so far, thanks not least to the strengthened regulatory capital base. At the same time, he cautioned that the capital buffers that have been in place since February of this year remain necessary in order to make the banking sector even more resilient. Regarding the discussion about the minimum reserve, he commented: “The banks should be able to cope well with a possible minimum reserve increase from 1% to 2%.” In this context, he remarked that the rate of 2% had already been a requirement for a considerable length of time in the past.

Dr Nagel described the excessively high inflation rate as a key challenge facing the monetary policy of the Eurosystem. He went on to explain that, because inflation rates are still expected to exceed the 2% target level this and next year, he believes it is considerably too early to even think about potentially lowering policy rates. Dr Nagel expressed the hope that inflation would finally come close to its target mark in 2025. “Higher financing costs, a lower supply of credit and weaker demand for loans are intentional monetary policy effects. This is a necessary interim step in order to dampen aggregate demand and, ultimately, price pressures,” Dr Nagel pointed out.

Looking to the years ahead, Dr Nagel announced that the Federal Ministry of Finance will likely not be able to expect any profit transfers from the Bundesbank as the Federal Government’s fiscal agent. This is due to the financial burdens resulting from the extraordinarily expansive monetary policy of recent years and the subsequent sharp rise in interest rates. “If the Bundesbank’s financial buffers are no longer sufficient in the next few years, we will report a loss carry-forward,” he said. But even then, he added, the Bundesbank’s balance sheet is sound, and cannot be compared with that of a commercial bank. The Bundesbank holds substantial assets over and above the financial buffers.

Volume of new loan commitments by vdp member institutions still clearly lower year on year, up again quarter on quarter

The institutions which together make up the Association of German Pfandbrief Banks (vdp) recorded a slight upturn in new real estate financing activity in the third quarter of 2023. Totalling EUR 30.7 billion, loan commitments for residential and commercial properties rose by 15.8% on the previous quarter (Q2 2023: EUR 26.5 billion). Year on year, on the other hand, they again reported a drop of 21.5% (Q3 2022: EUR 39.1 billion).

“Demand for real estate finance is picking up again slightly.”
Jens Tolckmitt

“Compared with previous years, new business in real estate financing remains at subdued levels. That said, we are now seeing an increase for the third quarter in succession. Commitments given for both residential and commercial real estate loans are on the rise, which indicates that the financing market is stabilizing slightly,” commented Jens Tolckmitt, the vdp’s Chief Executive. He went on to say that the framework conditions for real estate investments remain challenging, and many factors such as the geopolitical tensions, uncertainty about economic developments and low construction activity in the housing sector are putting a strain on the market. However: “The end of the rapid rise in interest rates seems to be giving back investors and households more and more planning security.”

Residential and commercial real estate loans see rather similar development

In terms of the asset classes, new business in real estate financing by the vdp member institutions experienced a rather similar development in the third quarter of 2023. Compared with the immediately preceding quarter, loan commitments were up for both residential properties (+13.4%) and commercial properties (+19.0%). By contrast, both asset classes recorded a significant decline compared with the corresponding quarter one year before: 22.5% for residential real estate loans and 20.2% for commercial real estate loans.

Of the residential real estate loans that were extended in the third quarter of 2023 totalling EUR 16.9 billion, somewhat less than half was accounted for by the financing of one- and two-family houses (EUR 8.0 billion compared with EUR 7.5 billion in the second quarter of 2023). Loans for condominiums and multi-family houses likewise rose on the quarter, namely to EUR 3.1 billion and EUR 4.8 billion respectively. However, they were still clearly below the corresponding figures for the third quarter of 2022.

New business in commercial real estate lending by the vdp member institutions, which totalled EUR 13.8 billion in the third quarter, was again dominated by loan commitments for office buildings. These accounted for a share of 45%. However, the volume of office property loans extended totalling EUR 6.2 billion was appreciably lower than the corresponding figures for both the previous quarter and the previous year. New loan commitments for retail properties totalled EUR 2.9 billion. Thus, they were up on the second quarter of this year, but fell clearly short of the corresponding figure year on year. New business in real estate financing for hotels and industrial buildings reached volumes of EUR 1.2 billion and EUR 0.2 billion respectively in the quarter under review.

At EUR 1.004,0 billion, the portfolio of real estate loans extended by vdp member institutions remained stable quarter on quarter (30.06.2023: EUR 1,004.2 billion). Year on year, the portfolio increased slightly by 1.1% (30.09.2022: EUR 993.0 billion).

vdp index: Residential property prices down 1.7% since second quarter

The price adjustments persisting in the German property market for the past year continued in the third quarter of 2023, with a reduction of 1.7% on average in residential and commercial property prices compared with the previous quarter. In a year-on-year comparison, this represented a decline of 7.1% versus the third quarter of 2022. The property price index of the Association of German Pfandbrief Banks (vdp) currently stands at 179.2 points (base year 2010 = 100 points), 8.0% lower than its high of the second quarter of 2022 (194.8 points). The vdp index has been compiled by vdpResearch every quarter since 2010 and, unlike other property market indices, is based on an evaluation of actual property transaction data from over 700 credit institutions, providing coverage of the entire German market quarter by quarter.

Residential property prices fell by 1.7% quarter on quarter in the third quarter of this year (Q3 2023 vs Q2 2023), and by 6.3% year on year (Q3 2023 vs Q3 2022). Compared with the peak level of mid-2022, prices for residential property in Germany have fallen by 7.0%.

Commercial property prices were down by 2.2% quarter on quarter and by 10.3% year on year in the third quarter of 2023. This puts the decline in these prices since their peak of the second quarter of 2022 at 12.3%. Commercial property prices had increased by 55.4% between 2010 and mid-2022.

“The price correction still applies to all asset classes.
A market recovery has yet to materialise.” Jens Tolckmitt

“The price developments seen in the first half of this year continued in the third quarter. The price correction still applies to all asset classes, although to a much lesser extent for residential property than for commercial property,” said vdp Chief Executive Jens Tolckmitt. “A market recovery has yet to materialise.”

Year-on-year change in prices (Q3 2023 compared with Q3 2022):

Residential/commercial properties overall: -7.1%
Residential properties in Germany:           -6.3%
Residential properties in the top 7 cities:  -5.7%

Commercial properties: -10.3%
– Office properties:        -10.6%
– Retail properties:          -9.3%

Quarter-on-quarter change in prices (Q3 2023 compared with Q2 2023):

Residential/commercial properties overall: -1.7%
Residential properties in Germany:             -1.7%
Residential properties in the top 7 cities:    -1.3%

Commercial properties: -2.2%
– Office properties:         -2.5%
– Retail properties:         -1.2%

Residential property: increasing rent under new contracts and returns

The decline in residential property prices by a quarterly 1.7% (Q3 2023 vs Q2 2023) and an annual 6.3% (Q3 2023 vs Q3 2022) was the result of similar price developments for multi-family properties (-1.7% and -6.8%, respectively) and owner-occupied properties (-1.6% and -5.8%, respectively). There was little difference between the two subcategories of owner-occupied properties (single-family houses and flats).

“A growing housing shortage is looming.”Jens Tolckmitt

The annual rates of change in rent under new contracts in multi-family properties were similar to the preceding quarter at +5.8% (+6.2%). “The increasing housing shortage and resulting excess demand is reflected in further rising rents. If housing construction does not pick up quickly in Germany, a growing housing shortage is looming,” said Tolckmitt. Returns on multi-family properties shot up again in the third quarter of this year. Measured against the vdp cap rate index, returns rose by 13.5% year on year, similar to the quarter-on-quarter rate (+14.2%).

Top 7: Berlin determines development once again

The decline in residential property prices was somewhat less pronounced in the top 7 cities than in Germany as a whole in the third quarter of 2023. Compared to the immediately preceding quarter, prices in the major cities fell by an average 1.3%, with few regional differences; the rates of change for all top 7 cities were between -1.0% and -2.0%. In a year-on-year comparison (-5,7% on average), the price drop was most pronounced in Frankfurt am Main (-9.1%), with the smallest decline in Berlin once again (-4.7%). Prices in Düsseldorf, Hamburg, Cologne, Munich and Stuttgart fell by between 5.1% and 6.8%.

Rent under new contracts in multi-family properties increased by an average 5.9% year on year in the top 7 cities, and returns by 11.9% in the same period. These increases were shaped by Berlin and Munich, which had the highest growth rates among the major cities in both rent under new contracts (8.7% and 5.2%) and returns (13.9% and 12.9%).

Commercial properties: larger price drop for offices than retail properties for first time

Declining prices for both retail and office properties contributed to the commercial property price drop of 2.2% on a quarterly basis and 10.3% in annual terms in the third quarter. Retail property prices fell by 1.2% and 9.3%, respectively, while office property prices dropped by 2.5% and 10.6% – the first time the decline in office property prices has exceeded that of retail property prices since 2009.

Returns on retail properties measured against the cap rate index increased by 1.7% quarter on quarter and 9.1% year on year in the third quarter of 2023. There was a slight increase for the third consecutive quarter in rent under new contracts, which has risen by 0.4% since the second quarter of this year. In a year-on-year comparison, it declined slightly, by 1.0%.

“Uncertainty remains high throughout the commercial property market.” Jens Tolckmitt

By contrast, there was a plus in rent under new contracts in the office property market, with quarterly growth of 1.1% and annual growth of 3.9%. Office property returns also made significant climbs, with rates of change of 3.7% and 16.2%, respectively.

“Adjusting to the changed return environment is essential in order to rekindle investor demand for office and retail properties,” said Tolckmitt. He believes that nobody can seriously predict at present when the two markets will recover properly, because the uncertainty in large parts of the commercial property market is still too high. This applies in particular to the office segment in light of discussions on working from home and ESG requirements. Stabilisation cannot be expected in the commercial property market until the market situation calms down for the long term, i.e. when conditions such as interest rates permit reliable planning. The current slowdown in construction activity could also potentially contribute to this.

Outlook: calmer waters ahead for residential property market

Tolckmitt said that in light of developments in the third quarter of 2023, the German property market still appeared strained and that further price drops were likely. “The commercial property market is still characterised by internal and external uncertainty that exerts pressure on capital values. However, the shortage of supply inextricably linked to the current subdued construction activity will likely counter this. We continue to expect declining prices for commercial properties for the next few quarters, as there is clearly no price balance yet in sight,” said the vdp Chief Executive.

“There will be no sharp price declines on the residential property market in the near future either.” Jens Tolckmitt

His view of the prospects for the residential property market were more positive, due among other reasons to stabilising financing applications at a low level and the general excess demand for housing. “The residential property market will soon be entering calmer waters. There have not been any sharp price declines thus far, and based on what we currently know, there are unlikely to be any for some time.”

Cooperation to verify EU taxonomy compliance in connection with the acquisition and ownership of real estate

The Association of German Pfandbrief Banks (vdp) and the consulting company Drees & Sommer have updated their top 15% benchmarking, a tool that has become firmly established in the market. The update will enable credit institutions to continue to verify compliance with the EU taxonomy in a comprehensible and transparent way when financing existing buildings and analyzing their real estate loan portfolios. In addition, the benchmarking has been expanded to include additional metrics for energy and CO2 emissions so that it now also takes current regulatory requirements such as the recently revised German Buildings Energy Act (GEG) into account.

Since April 2022, the benchmarking tool of vdp and Drees & Sommer has supported financial market players and the real estate industry in providing evidence of EU taxonomy compliance with regard to the economic activity “acquisition and ownership of real estate” set down in the taxonomy. Specifically, the tool is used to determine benchmarks for meeting the so-called top 15% criteria for real estate in Germany (residential and non-residential buildings). A building is considered to be taxonomy-compliant if, amongst other things, it belongs to the best 15% of the national or regional building stock in terms of its primary energy demand.

“The market response to our benchmarking has been strong and consistently positive. It facilitates credit institutions’ work in real estate financing tremendously. With the comprehensive update we make sure that the benchmarking will continue to be a valuable asset,” Sascha Kullig, Member of the Board of Directors at vdp, commented. “Fulfilment of the top 15% criteria is an important building block in the analysis of taxonomy compliance. Our clear and comprehensible criteria provide orientation and create transparency.”

According to the EU Taxonomy Regulation, the acquisition or ownership of a building constructed before 31 December 2020 makes a substantial contribution to the environmental objective of climate change mitigation if, amongst other things, one of the following two technical conditions is met: either the building has an Energy Performance Certificate class A, or verification can be provided that the building belongs to the best 15% of the national or regional building stock in terms of operational primary energy demand. A distinction is made here between residential and non-residential buildings.

“Within a three-month period we made an exhaustive comparison of the benchmarking with current regulatory requirements. Based on that, we updated which criteria must be fulfilled in order for properties to belong to the top 15% of their property class. In this way, it is possible to provide evidence in a transparent way that the buildings make a substantial contribution to the environmental objective of climate change mitigation. For better comparability, we also added more detailed energy metrics and values for CO2 emissions,” said Claudio Tschätsch, who is responsible for ESG and Sustainable Finance at Drees & Sommer.

The study was conducted exclusively for the vdp and its member banks and is based on representative, publicly available information sources. A summary of the results is available on the vdp’s website.

About Drees & Sommer:
Uniting opposites to create a world we want to live in.

What sets the partner-led consulting company Drees & Sommer SE apart is that they advise on and implement sustainable, innovative and economic solutions for real estate, industry, energy and infrastructure – or even offer clients both services from a single source. Since it was founded in 1970, the company has gained a reputation in the real estate sector as a pioneer of sustainability and driver of digitalization. Drees & Sommer have more than 5,100 employees at 59 locations. Inter-disciplinary teams working on over 5,000 projects worldwide pursue the goal of creating a livable future and uniting apparent opposites: tradition and future, analog and digital, efficiency and well-being. As entrepreneurs within the company, the personally responsible partners at Drees & Sommer are committed to this mission.