• vdp member institutions raise volume of mortgage loan commitments
• Real estate market turns corner after two years of falling prices
• Levels of new and outstanding Pfandbriefe remain high

In their assessment of the 2024 financial year, member institutions of the Association of German Pfandbrief Banks (vdp) have drawn a positive conclusion. Two principal factors contributed to this development. On the one hand, the downward trend in property prices that began in 2022 gave way to a sideways movement over the course of the year, even showing modest signs of growth as 2024 drew to a close. This was reflected in a stabilisation or slight increase in property prices, as well as in a higher volume of mortgage loan commitments. On the other hand, 2024 once again saw strong demand for Pfandbriefe, with vdp member institutions registering another year of brisk Pfandbrief sales.

“Pfandbrief banks successfully navigated a challenging market environment in 2024”
Gero Bergmann

At the Association’s annual media conference, vdp President Gero Bergmann emphasised that 2024 had been an exceptionally tough year for Pfandbrief banks. For its member institutions, the year was dominated by excessive regulation, the uncertainty following the collapse of Germany’s previous governing coalition as well as growing geopolitical crises and risks: “Our institutions have once again successfully navigated a still challenging market environment. Among other things, this was thanks to their solid capitalisation and prudent risk management, with lending activities based on first-ranking mortgages.”

In respect of the current state of the markets, he offered an upbeat picture: “On the whole, price developments over the last few quarters suggest the real estate market has plateaued. Prices for residential property are even returning to modest growth. There has also been a tentative rebound in our member banks’ mortgage finance activity. Now, we are hopeful that an urgently needed boost from economic and housing policy will provide the necessary momentum for the real estate sector.” Turning to the capital markets, he highlighted the encouraging trend that Pfandbriefe once again met with strong demand and that spreads on unsecured bank bonds had narrowed significantly – signs that investors have strong confidence in the resilience of German mortgage lenders.

“The multi-billion euro stimulus package announced by the German government may give a considerable boost to the economy. It is crucial that the additional funds are also invested in creating affordable housing.”
Gero Bergmann

In terms of the current financial year, Bergmann presented a mixed outlook. According to him, the world had become even more volatile since the new US administration took office and this was weighing on business sentiment. He added that excessive red tape was a major burden for companies in Germany: “The multi-billion euro stimulus package announced by the German government may give a considerable boost to the economy. However, it is crucial that the additional funds are not only invested in security, infrastructure and tackling climate change, but also in creating affordable housing.” He went on to stress that, at the same time, it was essential to make effective and dramatic cuts to bureaucratic red tape.

The vdp President does not expect any further increase in Bund yields and interest rates as a result of the planned multi-billion debt package announced by the German government and, consequently, of the investments that it will finance: “While the anticipated increase in Germany’s national debt may slightly reduce the pace of the current recovery on the real estate market in 2025, it will not stop it completely.” Altogether, he is optimistic about the prospects for Pfandbrief banks in the current financial year.

• Trends on the real estate market

Higher property prices in 2024

The price correction on the German real estate market that began in the middle of 2022 came to an end in 2024. Overall property prices actually recorded a modest increase of 1.8 % in the fourth quarter of the year compared to the same quarter of the previous year.

While prices for residential property recorded their third consecutive quarter-on-quarter increase in the final three months of 2024 (+2.1 %), commercial property prices continued to stabilise between October and December, posting their first slight increase in more than two years (+0.5 %).

“We are already seeing a turnaround in residential property prices.”
Gero Bergmann

“The fact that there was a modest rise in property prices in 2024 is evidence that they have bottomed out,” said Bergmann. “As prices for residential property have been gently trending upwards for several quarters, it is fair to say that we are already seeing a turnaround in this segment.” The commercial property market, however, was still moving sideways, he added.

Bergmann noted that anaemic growth in the economy and an extension of work-from-home policies in the wake of COVID-19 had had a particularly adverse impact on demand for office space. However, he was confident that the proportion of people working from home would decline over the next few years: “There is a trend towards returning to the office, which is already more pronounced in other countries than in Germany.” For 2025 as a whole, vdp expects residential property prices to continue growing at a moderate pace and those for commercial properties to stabilise further.

Total loan commitments by Pfandbrief banks in 2024 of € 121.1 bn

Greater demand for mortgages coincided with an uptick in property prices. Total commitments from vdp member banks for property loans amounted to € 121.1 bn in 2024 – an increase of 8.5 % on the previous year’s volume (2023: € 111.6 bn). This encouraging growth was mainly driven by a 14.9 % rise in residential mortgage lending to € 74.9 bn. However, loan commitments for commercial properties were roughly on a par with the previous year at € 46.2 bn (-0.4 %).

Office properties retained their status of previous years as the dominant commercial asset class. With a total volume of € 23.8 bn, not only were loan commitments for offices marginally above the previous year’s volume of € 23.4 bn, they were also nearly twice as high as that of retail mortgages which ranked in second place with a lending volume last year of € 12.3 bn. These were followed, much further behind, by loan commitments for hotel properties (€ 3.0 bn).

“There are signs of a recovery, primarily driven by the development of the residential property market.”
Gero Bergmann

“Investors rediscovered the real estate market in 2024. While the transaction volume was – as expected – significantly below that of the boom years before and during the pandemic, there are meanwhile signs of a recovery, primarily driven by the development of the residential property market”, Bergmann explained. He primarily attributed this to higher returns on real estate that had already come a long way to meeting the expectations of investors. With a view to the current year, he expects the recent trend to endure.

• Current regulatory issues

vdp calls for critical review of current regulation without prejudging the outcome

vdp CEO Jens Tolckmitt emphasised that excessive regulation and crippling levels of red tape were holding back the enormous potential for growth that still exists in Germany. In order to remove obstacles to innovation, a critical and open-minded review of current regulation was essential, especially in the financial sector, which is so vital to financing growth.

“It cannot be limited to a few isolated, showcase initiatives.”
Jens Tolckmitt

“A moratorium on regulation is long overdue,” stressed Tolckmitt. “Cutting unnecessary regulation must not just be a case of politics paying lip service to the problem. They need to take real action on it to create the conditions for boosting growth effectively. It cannot be limited to a few isolated, showcase initiatives.”

Housing crisis: Political initiative required to stimulate market activity

For many years now, vdp has been raising the alarm over the increasing shortage of housing in Germany, which is taking on ever more drastic proportions – especially in major cities. In the opinion of vdp, existing administrative structures are not suited to tackling the complex housing policy challenges. While the previous government’s decision to establish a stand-alone Federal Ministry for Housing was the right one, it does not have the necessary powers to provide the impetus needed. That is why vdp is in favour of retaining an independent Ministry for Housing and expanding its competencies to include, for example, the energy-efficient refurbishment of existing buildings.

Another obstacle on the housing market identified by vdp is the high level of additional costs for owner-occupiers when buying a home, which had added to the pressure on the rental market: “To boost demand for home ownership, it would make sense to reduce the real estate transfer tax and make it more flexible for owner-occupiers,” said Tolckmitt. In view of the high cost of financing a property, making large housing projects difficult to realise, vdp advocates for temporary state default guarantees for 80 % of loans provided to finance affordable housing. This solution has the potential to revitalise the market, which is currently struggling as a result of higher lending rates, without placing an appreciable burden on public finances. In fact, according to the German financial supervisory authority BaFin, total losses in this segment recently amounted to as little as 0.02 % of the volume of loans extended by credit institutions. Consequently, there would be very few situations in which the guarantee would be triggered. There are indications that the ongoing coalition talks between the CDU/CSU and the SPD may include an examination of such a state guarantee scheme, which vdp welcomes as a promising step. Despite this, Tolckmitt warns that the potential coalition partners are also planning to extend the law to cap rent increases – the so-called Mietpreisbremse or rent brake – and to impose tighter caps on rent rises. In his view, this would run counter to the pressing need for additional dwellings.

Macroprudential capital buffers: Supervisors should acknowledge favourable market developments

The Association has also called for urgent changes to macroprudential capital buffers imposed by BaFin, especially the systemic risk buffer on loans secured by residential property. Given a stable residential property market and the fact that mortgage lending does not present any structural risks, the arguments put forward by the supervisory authority when the buffer was introduced have long become obsolete.

“We call for the systemic risk buffer for residential mortgage loans to be rescinded.”
Jens Tolckmitt

Supervisors were ignoring an improved market environment, Tolckmitt argued, and instead constantly amending their justification for capital buffers. This had to stop: “We call for the systemic risk buffer to be rescinded, as there is meanwhile no fundamental justification for it whatsoever.” In his remarks, he highlighted the detrimental impact of the buffer on lending activities.

Sustainable Finance Disclosures Regulation: More workable regime needed

The Pfandbrief banks welcome the EU Commission’s intention, in particular, to streamline the European Sustainable Finance Disclosures Regulation (SFDR). Tolckmitt noted that banks’ primary criticism of the existing regulatory regime was centred on the fact that the EU taxonomy was unworkable in its practical application.

An example of this is the fact that the EU taxonomy and the EU Energy Performance of Buildings Directive (EPBD) adopt conflicting approaches to achieving the same goal. Here, vdp is strongly in favour of the EPBD’s so-called “worst first” approach which mandates that buildings with the greatest potential for energy efficiency improvements are retrofitted first. As such, vdp also calls for the taxonomy’s energy efficiency requirements for nearly zero-energy buildings to be aligned with national measures rather than the current lower threshold. Tolckmitt stressed that there were no grounds for stricter energy efficiency requirements at EU level than in national regulations.

“The Sustainable Finance Disclosures Regulation should be designed to actually contribute to
achieving policy objectives.”
Jens Tolckmitt

Furthermore, he pointed out that the benchmark for economic activities to be considered Taxonomy-aligned was currently far too high. Among other things, vdp argues that all renovation measures that achieve a reduction in energy consumption along a defined climate mitigation pathway should be classified as Taxonomy-aligned – not just those that reduce a building’s Primary Energy Demand by at least 30 %. In addition, the importance of the so-called Do No Significant Harm (DNSH) criteria must be significantly reduced. Altogether, the Sustainable Finance Disclosures Regulation should be designed to actually contribute to achieving policy objectives.

Basel III: Level playing field becoming further out of reach

In respect of the impending entry into force of Basel III capital adequacy requirements agreed last year, Tolckmitt said that while countries such as the United Kingdom or the United States were going to postpone, or potentially suspend, their implementation, the EU was still not planning to make any amendments to its framework. He added that this was not in keeping with the Basel Committee’s original objective of establishing a globally uniform standard and would not create a level playing field.

“The output floor leads to objectively unjustified capital requirements in the case of low-risk residential mortgage loans”.
Jens Tolckmitt

Finally, he voiced concerns that the so-called output floor, when fully loaded, would lead to objectively unjustified capital requirements, for instance in the case of low-risk residential mortgage loans. In addition, he argued that the risk weights of project development finance, so-called ADC loans, were unreasonably high. Underlining vdp’s position, he added that it was vital to avoid discouraging investment due to the burden this would place on banks, the real economy and the politically driven transition to net zero: “We call for the output floor level to be frozen at 50 percent or abolished completely”.

• Developments on the Pfandbrief market

Total Pfandbrief circulation remains at around € 400 bn

The Pfandbrief market demonstrated its resilience and stability in the 2024 financial year. With total Pfandbriefe in circulation of € 399.5 bn at year-end, there was almost no change on the previous year’s high figure (2023: € 400.3 bn).

The mortgage Pfandbrief once again proved to be the dominant category, accounting for 74 % of sales in 2024. Total Pfandbrief sales by vdp member banks in 2024 stood at € 57.3 bn. Although this was below the previous year’s strong performance (2023: € 65.7 bn.), it was above the volume the banks had forecast at the beginning of the year. Sales of so-called liquid Pfandbriefe, those with a volume of at least € 500 m, achieved their third-best result for the past decade with a total volume of € 29.9 bn in 2024.

Demand for sustainable issues continues to rise

Sustainable Pfandbriefe again met with keen interest among investors in 2024, with circulation of Green and Social Pfandbriefe climbing from € 24.1 bn to € 30.5 bn. The availability of loans eligible as cover pool assets proved to be a limiting factor, as demonstrated by a decline in Pfandbrief sales to € 7.1 bn (2023: € 8.5 bn). Despite this, the share of Green and Social Pfandbriefe as a proportion of benchmark issues grew to more than 20 % – with meanwhile 15 issuers of these Pfandbrief variants on the market. “Interest by issuers and investors in sustainable Pfandbriefe is undiminished,” Bergmann noted.

In response to a significant jump in spreads on government and quasi-sovereign bonds in 2024, particularly in the final quarter, Pfandbrief spreads widened over the year as a whole by 18 basis points. However, this was a temporary development as spreads on Pfandbriefe had already narrowed by 6 basis points in the first two months of 2025. Throughout the previous year, spreads on Pfandbriefe were noticeably lower than those on other covered bonds. Overall, within a recently volatile spread environment, covered bond spreads have remained largely stable.

“2025 has got off to a very strong start in terms of Pfandbrief sales”.
Gero Bergmann

According to Bergmann, 2025 had got off to a positive start: “January and February were very strong months in terms of sales, with total Pfandbrief issues by vdp member banks reaching € 22.2 bn – around 30 % higher than in the same period last year.” The fact that demand from investors for long-dated Pfandbriefe was rebounding again was an equally encouraging trend: “This development clearly reflects the confidence of investors in the stability and safety of Pfandbriefe.”

Bergmann also remarked on the fact that the Pfandbrief Act was set to celebrate its 20th anniversary this summer and recalled the major Pfandbrief milestones of the past two decades: “This year marks the twentieth anniversary of the Pfandbrief Act, twenty years in which issuers and investors have enjoyed a reliable framework within a challenging environment. And that is a key prerequisite for the continued success of the product,” emphasised the vdp President.

vdp membership development

The vdp maintains a total of 52 member institutions, which together account for a market share of almost 96 % of all Pfandbriefe in circulation. An overview of all member institutions can be found here: https://www.pfandbrief.de/site/de/vdp/verband/mitgliedschaft/mitglieder.html

Call by the vdp to include impulses for housing construction policy in coalition agreement

With regard to the upcoming coalition talks and the possible formation of a new Federal Government, the Association of German Pfandbrief Banks (vdp) is calling on the CDU/CSU and SPD to make housing construction policy a focal point of their work.

“The affordability of housing ought to be high on the political agenda.”
Jens Tolckmitt

“It was totally incomprehensible that the severe housing shortage played virtually no role in the election campaign. This makes it all the more important that the affordability of housing be placed high on the agenda of the coalition talks – for it is one of the key issues of our time. The housing market situation is becoming increasingly serious, particularly in the metropolitan areas. What we need now are swift political impulses that address the high costs as well as stable and dependable framework conditions that all market players can rely on over the long term,” the vdp’s Chief Executive Jens Tolckmitt emphasized.

”Besides defence and infrastructure, the growing shortage of affordable housing must also be given appropriate account.”
Jens Tolckmitt

Referring to the recent agreement between the CDU/CSU and SPD on extensive investments, Tolckmitt added: “We welcome the willingness of the CDU/CSU and SPD to mobilise substantial funds for Germany’s security and future viability. This is long overdue. However, we emphatically demand that, besides defence and infrastructure, the investments currently under discussion also take appropriate account of the shortage of affordable housing, which has grown increasingly severe in the past years. The housing shortage is more than a central social issue of our time. It is also an obstacle to a sustainable revitalization of our economy.”

Given the highly charged nature of the housing shortage in social terms, the vdp is submitting five demands to policymakers and supervisory authorities which would, in the vdp’s opinion, deliver positive impulses to ease the housing market in the short term.

1) Retain an independent Federal Building Ministry with extended powers
The vdp is highly appreciative of the work done by the Federal Building Ministry during the past three years. The ministry recognized the urgent need for action. However, its competencies have not always been enough to allow it to effectively tackle the tremendous housing-policy challenges it faces. For this reason, the vdp is calling on the CDU/CSU and SPD to retain an independent Federal Building Ministry while extending its remit to include the energy-efficient refurbishment of existing buildings.

2) Lower property transfer tax
With the objective of facilitating the acquisition of owner-occupied residential property and of reducing the financial burden for households, the vdp proposes lowering property transfer tax for owner-occupiers. This would significantly reduce the borrowed capital needed when buying a property, thereby making it easier for young families and first-time home buyers in particular to get a foot on the property ladder. The lower tax burden would, moreover, contribute to capital formation among the population. For this reason, the vdp urges the new Federal Government to exert greater influence on the federal states, which are responsible for levying property transfer tax.

3) Abolish the sectoral systemic risk buffer
A number of regulatory measures today make it more difficult for banks to provide real estate financing. One key factor in this context is the 2% sectoral systematic risk buffer that has been imposed on residential property loans in Germany since the beginning of 2022. The upshot is that banks are required to hold correspondingly more capital for residential property loans, which in turn restricts lending and makes it more expensive. The vdp wishes to point out that the supervisory bodies’ justifications for introducing this risk buffer –dynamic credit growth and rising property prices – have long ceased to be valid. A regulatory measure for which there is no objective reason must be abolished. A more moderate macroprudential policy would facilitate lending and encourage investment in housing construction.

4) Lower the risk weight for project developments
A further regulatory measure that obstructs the creation of additional housing and the sustainable transformation of the building stock is one specific element of the European implementation of the Basel III capital adequacy rules. The rule in question provides for a risk weight for ADC (Acquisition, Development and Construction) exposures in the same amount as for defaulted receivables. This constitutes a considerable and incomprehensible burden with regard to financing new residential property projects and the extensive energy-efficient refurbishment of existing residential properties. Lowering the risk weight for ADC exposures would substantially lessen the banks’ capital requirements and cut financing costs. The vdp urges the new Federal Government to advocate this step in Europe.

5) State default guarantees for housing construction
In order to support new housing construction in particular, which is so subdued at present, the vdp proposes the following concrete and swiftly implementable measure: that the state should assume default guarantees for 80% of the total amount of loans granted to create affordable housing. The financing costs for investments could be reduced significantly as a result. Given the historically low loss rates of residential construction loans – the Federal Financial Supervisory Authority (BaFin) puts the total losses from loans secured by residential properties in 2023 at 0.02% – it may be expected that the state would shoulder only a minimal financial burden by assuming the default guarantees.

vdp index shows year-on-year increase of 1.8% in fourth quarter of 2024

After German property prices declined in 2023, they recovered slightly in 2024. The property price index of the Association of German Pfandbrief Banks (vdp) rose to 178.4 points in the fourth quarter of last year. This was 1.8% above the level for the fourth quarter of 2023. Compared with the immediately preceding quarter, prices went up by 0.6%.

The figures used to calculate the vdp index have been collected by vdpResearch each quarter since 2010. They track price developments on the entire German market for residential, office and retail properties and – unlike other price indices – are based on an analysis of actual property transaction data from more than 700 credit institutions.

The main driver of the price increase in the fourth quarter of 2024 was the positive development in residential property prices, which were up by 2.1% compared with the closing quarter of 2023. From the third to the fourth quarter of 2024, the rate of growth came to 0.7%. For the first time since mid-2022, prices for commercial properties, which is to say office and retail property prices, together also grew compared with the corresponding quarter one year earlier (+0.5%). Commercial property prices were 0.3% higher than in the immediately preceding quarter.

“The development of property prices is again positive across the board, but there is still no sign of a dynamic upward trajectory.”
Jens Tolckmitt

“The development of property prices was again positive across the board in 2024, thereby solidifying the stabilization that set in several quarters ago. This is quite remarkable given the overall economic and geopolitical conditions,” vdp Chief Executive Jens Tolckmitt pointed out. “But there is still no sign of a dynamic upward trajectory. Reticence continues to characterize the commercial property market in particular. We are still seeing a sideways movement there.”

Residential properties: multi-family house prices rise appreciably

The 2.1% increase in German residential property prices compared with the fourth quarter of 2023 was mainly attributable to the positive development in prices for multi-family houses, which advanced by 2.9% in the same period compared with the fourth quarter of 2023. By contrast, price growth for owner-occupied housing, which includes single-family houses and condominiums, was somewhat lower at +1.2%. When comparing prices with the immediately preceding quarter, growth rates of +1.1 % for multi-family houses and +0.3 % for owner-occupied homes were recorded. Taken together, both developments resulted in a rise in residential property prices by 0.7% from the third to the fourth quarter of 2024.

As a result of the ever-increasing housing shortage in Germany, in addition to the observed price growth there was also a renewed rise in rents under new contracts for multi-family houses, namely by 4.6% year on year and by 1.0% quarter on quarter. Returns on rental properties as measured by the vdp index for cap rates grew by 1.6% compared with the fourth quarter of 2023. This was the smallest increase in returns since the third quarter of 2022.

“It is utterly incomprehensible that housing policy is playing only a minor role in the election campaign.”
Jens Tolckmitt

“It is utterly incomprehensible that housing policy is playing only a minor role – if any – in the current Bundestag (lower house) election campaign. The creation of more living space is one of today’s most pressing political and social issues, and harbours great potential for social conflict. The new federal government will have its work cut out in swiftly implementing far-reaching and targeted measures to stimulate housing construction, particularly in large cities,” Tolckmitt remarked.

Housing in top 7 markets: Prices up across the board, year on year and quarter on quarter

In the fourth quarter of 2024, prices for residential properties in Germany’s top 7 cities rose somewhat more strongly than in the country as a whole. Residential property prices in Berlin, Cologne, Düsseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart increased by 2.3 % on average compared with the fourth quarter of 2023. Measured against the immediately preceding quarter, prices in the metropolitan areas rose by an average of 0.9%.

All of the 7 top cities reported price increases both year on year and quarter on quarter. Compared with the fourth quarter of 2023, growth was most pronounced in Cologne (3.8%), whereas only slight growth rates were seen in Stuttgart (0.3%) and Düsseldorf (0.8%). Compared with the third quarter of 2024, price increases for residential properties in the seven metropolitan areas ranged from 0.4% in Stuttgart to 1.4% in Cologne and Munich.

Rents under new contracts for multi-family houses were up across all top 7 cities, rising by an average of 3.9%. The smallest increase was recorded for Cologne (2.6%). Stuttgart, on the other hand, saw the strongest increase in rents under new contracts (4.6%), followed by Berlin (4.4%). Growth in returns as measured by the vdp cap rate index averaged 1.4% in the top 7 cities compared with the fourth quarter of 2023, although the individual growth rates were mixed. Whereas returns fell in Cologne (-1.5%), they rose in the other six top cities, especially in Stuttgart (+4.0%).

Commercial properties: office prices edge up again for the first time since 2022

Office property prices in particular contributed to the slight increase in commercial property prices, which rose by 0.5% year on year and by 0.3% quarter on quarter.    Between the fourth quarters of 2023 and 2024, office prices went up by 0.7%. This was the first year-on-year increase in prices for office premises since the third quarter of 2022. Compared with the immediately preceding quarter, office prices saw only minimal growth of 0.2%. Retail property prices contracted slightly
(-0.2%) in the fourth quarter of 2024 compared with the fourth quarter of 2023. By contrast, retail property prices were 0.4% higher than in the third quarter of 2024.

Office and retail properties saw both returns and rents under new contracts pick up in the final quarter of 2024. While office rents rose by 2.7%, rents for retail properties increased by 3.0% – compared with the fourth quarter of 2023 in each case. Returns as measured by the vdp cap rate index grew by 2.0% for office properties and by 3.2% for retail properties year on year.

Outlook: “Germany needs to strengthen its competitiveness”

The incumbent federal government recently revised its economic forecast downwards again considerably, and now expects the economy to grow by only 0.3% in 2025. The German economy actually contracted in the years 2023 and 2024. Against this backdrop, Tolckmitt emphasized: “Germany faces a decisive year. It must finally succeed in creating tangible economic-policy impulses. This would strengthen Germany’s competitiveness and stimulate economic growth, thereby having a positive impact on the property market, too.”

“A reliable estimate of future price trends is subject to great uncertainty.”
Jens Tolckmitt

He added that a reliable estimate of future price trends is subject to great uncertainty. Much will depend, he explained, on economic developments and on whether investor demand picks up in the coming quarters. Moreover, Tolckmitt pointed out that the long-term effects of mobile working on the use of office properties remain uncertain.

GdW and vdp call for sweeping changes to regulatory framework

Since the EU taxonomy came into force, the Federal Association of German Housing and Real Estate Companies, GdW, and the Association of German Pfandbrief Banks, vdp, have criticised many of its aspects as unworkable in practice. Now, both associations have published a joint position paper in which they set out their key objections and put forward specific recommendations for improvement.

Both GdW and vdp remain firmly committed to the intention behind the Green Deal of channelling investment into environmentally friendly projects and, in this way, contributing to achieving the EU’s climate goals. However, the two associations believe that the current structure of the overarching regulatory framework for sustainable finance is not fit for purpose:

“In its scope and complexity, the EU taxonomy has reached a level that puts enormous pressure on the resources of credit institutions, companies and consumers and, as such, significantly diminishes the framework’s prospects of success”, warns Sascha Kullig, a member of vdp’s Management Board.

“The EU taxonomy exclusively prioritises the treatment of buildings with the best energy efficiency performance”, stresses GdW-President Axel Gedaschko. “That means the vast majority of capital flows into property that has been renovated to a very high standard. This approach discriminates against those with poor energy efficiency ratings and, in turn, undermines the EU’s climate goals.”

In the view of both associations, recommendations published by the Platform for Sustainable Finance on 8 January 2025 on changes to the taxonomy only represent a small step in the right direction. From the standpoint of the financial and housing sectors, vdp and GdW have identified five key obstacles in the EU taxonomy that stand in the way of achieving the EU’s climate goals. At the same time, both associations have outlined a number of possible solutions:

1) The requirements for new buildings in terms of their Primary Energy Demand increase construction costs without making any significant contribution to reducing carbon emissions.

>> Detailed criticism:
The EU taxonomy states that the Primary Energy Demand (PED) of any building constructed after 31 December 2020 must be at least 10 % lower than the threshold set for nearly zero-energy building (NZEB) requirements in national measures. This rule prevents the affordable construction of new buildings and undermines efforts by Germany and the EU to reduce the cost of construction and, in this way, increase the supply of affordable housing.

>> Solution:
GdW and vdp call for energy efficiency requirements to be aligned with national measures for nearly zero-energy buildings rather than exceeding them. Both associations feel that this would be conducive to achieving more cost-effective new buildings and more affordable rents.

2) There are glaring contradictions between the EU taxonomy and the EU Energy Performance of Buildings Directive (EPBD).

>> Detailed criticism:
While the EU taxonomy’s requirements are almost exclusively focused on the ultimate goal of net zero (“best-in-class” approach), the aim of the EU’s Energy Performance of Buildings Directive (EPBD) is to upgrade buildings that currently have the worst energy efficiency performance (“worst-first” approach). It is absurd to pursue two entirely contradictory approaches in two regulatory proposals, both of which originate from the same institution and share the same goal. This inconsistency has given rise to considerable uncertainty in the financial sector as well as the real economy and is delaying the implementation of measures to improve energy efficiency.

>> Solution:
GdW and vdp are of the opinion that the EPBD’s focus on buildings with the worst energy efficiency performance has a considerably better chance of succeeding than the opposite approach taken by the EU taxonomy rules. Both associations point out that renovating buildings with poor energy efficiency ratings can achieve significantly greater and more rapid efficiency gains than is the case for buildings that already have a high energy efficiency performance. In light of this, GdW and vdp call for a harmonisation of the approach towards energy efficiency in both regulations so that the regulatory framework for sustainable finance adopts a consistent worst-first approach as its goal.

3) The bar for Taxonomy alignment has been set too high. There is no acknowledgement of net zero pathways and efficiency gains from renewable energy sources.

>> Detailed criticism:
To be considered Taxonomy-aligned and benefit from favourable financing conditions, renovation work must result in a minimum reduction of 30 % in a building’s Primary Energy Demand. In future, financing costs may increase for renovation work that achieves lower energy efficiency gains as a result of not being Taxonomy-aligned. The same applies to buildings that adopt a long-term net zero pathway but currently have poor energy efficiency ratings. In addition, the taxonomy does not provide for the recognition of efficiency gains from renewable energy sources when buildings undergo energy efficient renovations.

>> Solution:
GdW and vdp advocate an amendment to the taxonomy that would recognise all types of renovation work that achieve energy efficiency gains along a defined net zero pathway as Taxonomy-aligned, including efficiency gains from using renewable energy sources. Furthermore, both associations call for a whole building and its entire financing, unlike in the past, to be classified as Taxonomy-aligned if the taxonomy requirements for an energy efficient renovation are met.

4) The “Do No Significant Harm” (DNSH) criteria referred to in the EU taxonomy lead to unjustified and substantial extra costs.

>> Detailed criticism:
According to the EU taxonomy, failure to comply with even one of the six DNSH criteria renders a building and its financing non-Taxonomy aligned. For example, if the plumbing system in a property exceeds a certain threshold, the entire building and its financing lose their taxonomy eligibility – regardless of how energy efficient the building may be. The audit procedures required are so time consuming and involve such extensive documentation that the costs and benefits end up being out of all proportion to one another. What is more, the significant additional costs that this adds to renovation work have a direct impact on the affordability of living space and jeopardise acceptance in society of the very principle of the transition to net zero.

>> Solution:
Irrespective of the relevance of all DNSH criteria, GdW and vdp take the view that the number and complexity of their associated requirements are unacceptably high. To counter this, the associations propose, in particular, that requirements for the criteria of “construction of new buildings” and “renovation of existing buildings” should be significantly reduced. In addition, they recommend that all DNSH criteria should be designated as “monitoring criteria”, so that non-compliance with any one provision does not automatically result in the loss of taxonomy alignment.

5) Environmental criteria are the sole focus of the EU taxonomy. It fails to consider any social dimensions.

>> Detailed criticism:
The EU taxonomy’s narrow focus on environmental goals means that projects that yield social benefits, for example, take a back seat. Yet policymakers and the business community agree that incorporating social aspects into urban planning contributes to a community’s overall well-being.

>> Solution:
GdW and vdp advocate the inclusion of sociocultural aspects into the existing framework of the taxonomy in order to create a balance between environmental and social dimensions. This would ensure that credit is also given to non-quantifiable factors that contribute to social cohesion, such as those provided by housing associations within the scope of their statutory remit. Specifically, Specifically, the two associations are proposing the introduction of compensatory mechanisms: For instance, if a building provides comparatively low rents, is located in a neighbourhood with a high quality of life or is close to community facilities, this could offset any failure to meet certain environmental requirements. By taking this approach, a significant number of additional properties and loans could be made Taxonomy-aligned.

Capital market experts anticipate growing reticence in the issuance of unsecured bank bonds

The outlook for Pfandbrief sales in the coming six months is a positive one. That is the finding of the fifth survey conducted by the Association of German Pfandbrief Banks (vdp) among its member banks’ capital market experts. They expect an improvement in demand for Pfandbriefe (score +21 points) and, at the same time, an increase in property lending business to be refinanced (score +33 points).

The overall score for the vdp Issuance Climate, which gauges the sentiment in the market for Pfandbriefe and the capital market for the last six months, the present, and the coming six months, is in slightly negative territory, as in the previous survey of June of this year. The individual sub-scores for both Pfandbriefe and unsecured bank bonds are likewise preceded by a minus sign.

Scores above the December 2023 results

The results of the survey, which is carried out twice a year, are published under the heading “vdp Issuance Climate”. The sentiment indicator ranges from -100 to +100 points, and currently shows a slightly gloomy sentiment with a score of -14 points. The difference between the scores for Pfandbriefe (-18) and unsecured bank bonds (-8) is again a little wider than in June 2024. Compared with the survey of early summer, the overall score slipped by 2 points, with the sub-score for Pfandbriefe down by 7 points, whereas the sub-score for unsecured bank bonds improved by 6 points. It is pleasing to note that all three scores are currently better than in December 2023.

Worsening sentiment in the last six months

The sentiment worsened appreciably in the last six months in terms of Pfandbrief sales, with capital market experts giving a score of -43 points for investor demand for Pfandbriefe in the last six months. Their assessment of the present situation is somewhat better, with a score of -35 points. Regarding sales of unsecured bank bonds, the sentiment brightened considerably, showing a score of +27 points for the last six months and +42 points for the present.

The main driver of the Pfandbrief scores, which are still slightly in negative territory, is the current asset-swap level (score -83), which provides information on refinancing costs. Only a slight easing is expected here over the next six months, as is reflected in the score of -72.

Interest rate developments in the next six months could become something of a burden for both Pfandbriefe and unsecured bank bonds, according to the forecast by the surveyed capital market experts (score of -70 in each case). That said, opinions differ considerably on the level of the deposit rate for the next year. While some experts only expect interest rate cuts of not more than 75 basis points, others envisage interest rate cuts in excess of 150 basis points over the year ahead.

Strong Pfandbrief sales in 2024

In the first 11 months of 2024 the vdp member banks issued Pfandbriefe with a total volume of EUR 50.2 bn. Of this total, mortgage Pfandbriefe accounted for just over EUR 37 bn, public Pfandbriefe for EUR 12.4 bn, and ship Pfandbriefe for just under EUR 800 million. With that, the issue volume was 12% below the very high figure reported one year earlier, yet was slightly above the member banks’ planned figure for 2024 (just under EUR 50 bn). It was pleasing to note in this context that – unlike in 2023 – longer-dated Pfandbriefe could also be placed again this year due, amongst other things, to the more normalized yield curve.

Somewhat lower demand likely for unsecured bonds going forward

As in the first half of 2024, the vdp member banks reported also for the last six months and for the present stable and strong investor demand respectively for unsecured bank bonds. A score of +27 points was calculated for the last six months, and of even +42 points for the present. In view of the sharp drop in spreads on unsecured bank bonds in the meantime, expectations are considerably more skeptical about investor demand in the coming six months, with a score of 0 points.

“The strong demand for unsecured bank bonds in 2024 shows the confidence investors place in the credit quality of the issuing banks, which prove their resilience even in times of difficult property markets,” commented Sascha Kullig, Management Board member at the vdp.

Pfandbrief market likely to grow further in 2025

Looking ahead to 2025, the vdp member banks expect the Pfandbrief market to see further growth. Planned new issues total EUR 49.4 bn as against maturities totaling EUR 45.8 bn. The expected volume of new mortgage Pfandbriefe is stated at EUR 40.3 bn, new public Pfandbriefe at EUR 8.6 bn, and new ship Pfandbriefe at EUR 0.5 bn. Thus, the volume of outstanding Pfandbriefe, which has risen continuously since 2019, is set to increase further in 2025. As at end-September the volume of outstanding Pfandbriefe came to around EUR 402.5 bn.

“Despite a number of negative factors, robust demand for Pfandbriefe is expected for the next six months. Moderate growth in lending will likely give rise to a corresponding need for issuing activity,” Kullig remarked.

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.

vdp index still in decline year on year; for the first time, slight increase again recorded quarter on quarter

The downward movement that has characterized property prices in Germany for just under two years was halted in the second quarter of this year. The property price index of the Association of German Pfandbrief Banks (vdp) achieved a score of 175.5 points, and thus was 0.5% above the level recorded in the first quarter of 2024. The index value was still lower (-3.8%) compared with the second quarter of the previous year. vdpResearch has calculated the vdp index each quarter since 2010 based – unlike other property indices – on an analysis of actual property transaction data collected from more than 700 credit institutions. In this way, the index tracks price developments on the overall German market for residential, office and retail properties.

Like the overall index, the index for residential property prices recorded a slight increase of 0.5% quarter on quarter (Q2 2024 against Q1 2024). Year on year (Q2 2024 against Q2 2023), on the other hand, residential property prices were down by 2.9%.

A more significant price correction (-7.4%) was again seen year on year in commercial property prices, which is to say prices for office and retail properties. However, they likewise rose slightly (+0.4%) from the first to the second quarter of this year.

“Achievable returns are apparently again in keeping with investors’ expectations.” Jens Tolckmitt

“After property prices in Germany have fallen persistently for almost two years, we are now seeing signs that the market is calming down. Prices appear to have adjusted to such an extent in the meantime that the achievable returns are in keeping with investors’ expectations in the new interest rate and valuation environment,” vdp Chief Executive Jens Tolckmitt stated. Nevertheless, he does not think property prices will rise appreciably in the short term. “We expect the emerging sideways movement to continue for several quarters. Uncertainty factors with regard to future price developments are the current, further heightened risk of geopolitical conflicts spreading and the subdued economic activity in Germany at present.”

Residential properties: rents under new contracts for multi-family houses continue to rise

For the first time since the second quarter of 2022, residential property prices did not fall quarter on quarter, but instead proved to be practically stable, rising slightly by 0.5%. Here, prices for multi-family houses and owner-occupied housing went up by 0.5% in each case between the first and second quarter of 2024.

Prices in both sectors also followed an almost parallel trajectory year on year, albeit with a negative sign. Whereas prices for multi-family houses fell by 2.8% compared with the second quarter one year earlier, prices for single-family houses and condominiums dropped by 3.0%. Both these developments contributed to a 2.9% decrease in residential property prices overall between the second quarter of 2023 and the second quarter of 2024.

Rents under new contracts for multi-family houses continued to rise in the second quarter of this year, increasing by 6.1% year on year and 1.4% quarter on quarter. Returns on rental properties as measured by the vdp index for cap rates rose by 9.2% between the second quarter of 2023 and the second quarter of 2024. With that, growth in returns slowed down somewhat for the third consecutive quarter (Q1 2024: +10.8% / Q4 2023: +12.9% / Q3 2023: +13.5% –> compared with the corresponding quarter one year earlier in each case).

“Only policymakers can solve the dilemma of the growing housing shortage.”Jens Tolckmitt

“The housing shortage in Germany is currently intensifying from month to month, especially in the metropolitan regions, with the inevitable consequence that rents continue to rise. This poses a growing social challenge. Only policymakers can solve this dilemma. Although the recently presented draft amendment to the Federal Building Code points in the right direction, it will not be enough to curb the rising shortage of housing space,” Tolckmitt commented. He explained that an even more extensive raft of wide-ranging measures is needed. In addition, the obvious conflict of objectives between the creation of affordable housing and the costly sustainable transformation of the building stock must be resolved. “Measures to facilitate the affordability of housing are being thwarted by the simultaneous demand that strict and cost-intensive sustainability requirements for buildings are met.”

Housing in top 7 markets: prices in Cologne are most resilient

Residential property prices in Germany’s top 7 cities fell slightly less heavily (-2.5% on average) than in Germany as a whole (-2.9%) year on year. The individual rates of change varied from -1.6% in Cologne to -4.7% in Munich.

Compared with the first quarter of 2024, residential property prices developed unevenly in Germany’s major cities. Whereas they contracted slightly in Düsseldorf (-0.5%), Munich (-0.4%) and Stuttgart (-0.2%), they rose in Frankfurt am Main (+0.5%), Hamburg (+0.6%), Cologne (+1.1%) and Berlin (+1.2%). On average, prices across all top 7 cities were up by 0.7% compared with the immediately preceding quarter.

Once again, Berlin experienced the highest year-on-year increase in rents under new contracts for multi-family houses (+6.9%), followed by Frankfurt am Main (+5.1%) and Munich (+4.5%). Across all top 7 cities, growth in rents under new contracts amounted to 5.5% on average.

The highest increase in returns (+9.7%) was again recorded in Munich, followed by Berlin (+8.9%), Stuttgart (+8.5%) and Düsseldorf (+8.4%). The average growth in returns across Germany’s top 7 cities came to 8.3%.

Commercial properties: price level maintained quarter on quarter

In the quarter under review, the downturn again affected the commercial property market more strongly than the residential property market. Compared with the second quarter of 2023, commercial property prices fell by 7.4%, whereby the drop in prices for office properties (-7.9%) was more pronounced than the price correction for retail properties (-5.9%).

By contrast, commercial properties were able to maintain their price level quarter on quarter. The rate of change between the first and second quarter of 2024 was +0.5%, and accounted for growth in office property prices (+0.3%) and retail property prices (+0.7%).

As measured by the vdp cap rate index, office and retail properties again generated considerable increases in returns in the quarter under review. Year on year, returns for office and retail premises rose by 10.9% and 9.6% respectively. The increase in rents under new contracts for retail properties (+3.1%) was somewhat higher than for offices (+2.1%).

Outlook: potential for further setbacks limited in the meantime

“The situation in the commercial property market remains tense. Transactions and turnover are still at below-average levels. Nevertheless, we are seeing growing signs that the downturn in the commercial property market is losing momentum,” Tolckmitt pointed out. He added that future price developments will depend on the extent to which the stagnation the German economy has now entered combined with the gloomy sentiment among businesses weigh on the real estate industry.

“There are signs that the difficult situation is easing.” Jens Tolckmitt

In conclusion, the vdp Chief Executive looked to the future: “After a downturn lasting two years, the potential for further setbacks now seems to be limited.” Tolckmitt added that, given the current external risk factors such as geopolitics and economic growth, the possibility of renewed setbacks in the coming quarters cannot be entirely ruled out. However, the already discernible sideways movement in property prices will manifest itself in the trend over the next year – more quickly for residential properties than for commercial properties. “It is still much too early to declare a trend reversal, but there are signs that the difficult situation is easing.”

Quarter on quarter, vdp index shows slight price increases across the board

The stabilization of German property prices observed since the beginning of the year continued in the third quarter of 2024. Standing at 177.3 points, the property price index of the Association of German Pfandbrief Banks (vdp) exceeded the figure for the previous quarter by 1.0%. Compared with the third quarter of 2023, however, the price index was still down by 1.0%. vdpResearch has calculated the vdp index each quarter since 2010 based – unlike other price indices – on an analysis of actual property transaction data collected from more than 700 credit institutions. In this way, the index tracks price developments on the entire German market for residential, office and retail properties.

The increase in property prices in Germany was driven by residential property prices, which were up by 1.1% compared with the immediately preceding quarter (Q3 2024 against Q2 2024). Year on year (Q3 2024 against Q3 2023), on the other hand, residential property prices were still down slightly by 0.2%.

The trend for commercial property prices, which is to say office and retail property prices, again proved to be quite significant, with prices 4.7% lower than in the third quarter of 2023. However, commercial properties experienced an overall increase of 0.7% from the second to the third quarter of this year.

“Still too early to speak of the start of a lasting property market upturn.”
Jens Tolckmitt

“For the second consecutive quarter, property prices are following a positive trend compared with the immediately preceding quarter,” vdp Chief Executive Jens Tolckmitt pointed out. “Recent property price developments in Germany are a ray of light in an otherwise rather challenging geopolitical and macroeconomic environment, both nationally and internationally. Given these overall conditions, too, we believe it is still too early to speak of the start of a lasting property market upturn. Only the development of the index over the coming quarters will shed light on how robust the current market stabilization actually is.”

Residential properties: multi-family house prices rise year on year

The increase in residential property prices by 1.1% overall against the second quarter of 2024 was driven somewhat more strongly by price growth for multi-family houses (+1.3%) than for owner-occupied homes (+0.8%). Comparison with the third quarter of 2023 presents a different picture. Whereas prices for multi-family houses rose marginally here, too (+0.2%), prices in the owner-occupied housing sector, which is to say single-family houses and condominiums, were down slightly (-0.6%) year on year. Both developments together ultimately resulted in a minimal drop in residential property prices as a whole (-0.2%) between the third quarter of 2023 and the third quarter of 2024.

Rents under new contracts for multi-family houses rose again in the quarter under review, reflecting the persistent housing shortage in Germany. The rate of growth came to +0.7% on the quarter and +5.6% on the year. Returns on rental properties as measured by the vdp index for cap rates grew by 5.3% year on year. However, this was the smallest increase in returns since the third quarter of 2022.

“The situation on the housing market continues to worsen.”
Jens Tolckmitt

“Housing is already far too scarce. Nevertheless, month for month, fewer and fewer building permits are being reported, and building completions are languishing at much too low levels. The situation on the housing market continues to worsen,” Tolckmitt emphasized and, despite the current government crisis, he appealed to Germany’s political actors: “We urgently need decisive measures that will stimulate housing construction quickly and recognizably. These decisions must not be delayed any longer.”

Housing in top 7 markets: rents under new contracts and returns clearly on the rise

The development of residential property prices throughout Germany hardly deviated from the rates of change in the top 7 cities. In the third quarter of 2024, prices of residential properties in the seven metropolises went up by an average of 1.1% against the immediately preceding quarter. By comparison, they were still minimally lower (-0.1%) year on year.

Whereas prices moved up in all seven metropolises from the second to the third quarter of 2024 – most strongly in Frankfurt am Main (+1.6%) as well as in Düsseldorf and Munich (+1.5% in each case) – the trend in prices was mixed year on year. Prices in Cologne (+1.4%), Berlin (+0.4%) and Frankfurt am Main (+0.1%) increased, while those in Munich (-1.7%), Düsseldorf, Stuttgart (-1.5% in each case) and Hamburg (-0.2%) contracted.

By contrast, rents under new contracts for multi-family houses saw a marked increase across all top 7 cities (+4.6% on average), with the strongest growth reported for Berlin (+5.4%).

Among Germany’s top 7 cities, returns grew most strongly in the third quarter of 2024 in Stuttgart (+5.4%), closely followed by Munich (+5.3%), Berlin
(+5.2%) and Düsseldorf (+5.1%). The average rise in returns for the top 7 cities came to 4.7%.

Commercial properties: offices and retail premises see similar development

In the third quarter of 2024, too, the downturn phase in the property market had a considerably more significant impact, year on year, on commercial properties than on residential properties. Compared with the third quarter of 2023, commercial property prices fell by 4.7% amidst continuing moderate market activity. Prices in both sectors (-4.8% for offices and -4.5% for commercial premises) followed a fairly similar path.

Compared with the immediately preceding quarter, commercial property prices picked up on the whole by 0.7%. This was mainly attributable to rising prices for office properties (+0.8%). Retail property prices, on the other hand, increased only slightly (+0.3%).

As in the previous quarters, the vdp cap rate index measured a noticeable increase in returns, both for offices and for retail properties. Compared with the third quarter of 2023, returns for office and retail properties advanced by 6.9% and 8.1% respectively. Rents under new contracts likewise continued to rise in the quarter under review, achieving rates of change of +1.8% for offices and +3.3% for retail premises year on year.

Outlook: into 2025 with a stronger tailwind

“The situation in the German property market has eased appreciably in the course of this year. Nevertheless, it is still too early to sound the all-clear,” Tolckmitt emphasized. He warned that, particularly for commercial properties, the current development is as yet no more than a first indication of an end to the two-year decline in prices and the entry into a possible sideways movement.

“In view of economic developments and geopolitical risks, setbacks still cannot be ruled out.”
Jens Tolckmitt

“Only when the transaction numbers and financing volumes continue to climb substantially in all asset classes will the downturn phase be fully overcome. The present trend makes this scenario a possibility in the coming year,” Tolckmitt commented. At the same time, however, he pointed to the many uncertainty factors, first and foremost economic developments in Germany and the ongoing geopolitical risks. He went on to say that, against this backdrop, setbacks in price growth still cannot be ruled out. Nevertheless, Tolckmitt concluded on an optimistic note: “In any event, we will start 2025 with a stronger tailwind than we did in 2024.”

New lending by vdp member banks rises by 15.6% in the second quarter

In the second quarter of 2024, the banks which together make up the Association of German Pfandbrief Banks (vdp) extended property loans totalling EUR 31.2 bn – an increase of 15.6% compared with the second quarter of 2023 (EUR 27.0 bn). With that, for the third quarter in succession, the volume of new lending exceeded the corresponding quarters one year earlier in each case, and reached the highest figure since the third quarter of 2022 (EUR 39.4 bn). From the beginning of 2024 to mid-year, real estate lending totalled EUR 58.2 bn, which is equivalent to growth of 10.2% compared with the first half-year of 2023 (EUR 52.8 bn).

This positive trend in new lending activity was driven by residential property financing, the volume rising by 33.1% to EUR 20.1 bn between the second quarter of 2023 and the second quarter of 2024 (Q2 2023: EUR 15.1 bn). In the first half-year of 2024, total lending for the construction and purchase of residential properties came to EUR 37.9 bn. This was 19.6% up on the corresponding period one year earlier (H1 2023: EUR 31.7 bn). By contrast, commercial property loans totalled EUR 11.1 bn in the second quarter of 2024 and EUR 20.3 bn in the first half-year of 2024. This was a decrease of 6.7% and 3.8% respectively compared with the corresponding quarter and half-year one year earlier (Q2 2023: EUR 11.9 bn; H1 2023: EUR 21.1 bn).

“The growth in total lending reflects how demand for residential properties is again rising significantly.” Jens Tolckmitt

“For the first time since autumn 2022, total property financing in one quarter is above EUR 31 bn. We had already seen signs of a property financing recovery in the first quarter of this year, and now it is solidifying,” remarked vdp Chief Executive Jens Tolckmitt. “Our recently published vdp index figures on price developments likewise indicate that the two-year downturn on the German property market is coming to an end. The residential property market in particular is already benefitting from the interest rate and price environment, which has become more stable in the meantime, and the adjusted returns. Given these general conditions, demand for residential properties is rising significantly. The growth in total lending is a reflection of this development.”

Residential property financing: growth in all segments

Of the total volume of residential property loans extended (EUR 20.1 bn), almost half (EUR 9.5 bn) was accounted for by new lending for one-and two-family houses (share: 47.3%). Compared with the second quarter one year earlier, this market segment grew in the second quarter of 2024, namely by 25.0%, as did loans for condominiums (+38.7%) and for multi-family houses (+57.6%). Comparing the first half of 2024 with the first half of 2023, financing for one- and two-family houses rose by 24.2%, condominiums by 37.9% and multi-family houses by 2.2%.

Commercial property loans: increased volume for retail properties

In contrast to new residential property financing, new commercial property loans extended did not yet experience a recovery in the second quarter of this year.    Total new lending of EUR 11.1 bn was made up of loans for office properties (EUR 5.0 bn), retail properties (EUR 3.7 bn), hotel properties (EUR 0.6 bn) as well as other commercial buildings (EUR 1.8 bn). Whereas lending for retail properties and other commercial buildings rose considerably compared with the previous year on both a quarterly and a half-yearly basis, lending volumes for offices and hotels fell markedly.

Property financing portfolio remains above EUR 1,000 bn

The portfolio of property loans extended by the vdp member banks amounted to EUR 1,007.2 bn as at 30 June 2024. This was slightly higher than the immediately preceding quarter (31 March 2024: EUR 1,003.5 bn). Properties located in Germany accounted for by far the greater part of the financing volume (around 87%).

Changes focus on criteria for eligible assets

The Association of German Pfandbrief Banks (vdp) has, together with the issuers of Green Pfandbriefe, updated the Minimum Standards for Green Mortgage Pfandbriefe and Green Public Pfandbriefe. The amendments to the Minimum Standards will come into force with effect from 1 January 2025, with member banks free to apply them before that date should they so wish. The Minimum Standards in the version in force on the issuance date in each case will apply to Pfandbrief issues already outstanding.

The most important changes to the Minimum Standards for Green Mortgage Pfandbriefe concern the criteria for eligible assets:

In the case of new construction financing, the property will in future have to have a primary energy requirement of at least 10% below the national standard for nearly zero energy buildings (NZEB). Up until now, it has been sufficient for the property to comply with statutory energy standards for new buildings.

When financing existing residential properties, it must in future be possible to assign the residential property to at least energy efficiency class A. Up until now, energy efficiency class B or better has been sufficient.

The criterion that the commercial property can be assigned to at least energy efficiency class A will also be added for the financing of existing commercial properties.

In addition, a number of formal changes will be made to the framework. The amendments to the Minimum Standards for Green Public Pfandbriefe will merely serve to harmonise the wording with that of the standards for Green Mortgage Pfandbriefe, but will not affect the definition of eligible assets, i.e. the content.

“By updating the Minimum Standards, the requirements that green cover assets must meet will be more closely aligned with the EU taxonomy.” It is not possible, nor is it planned in the foreseeable future, to gear them to all requirements of the taxonomy due to the complexity, the lack of practicability and the insufficient transformation concept of the taxonomy criteria, Sascha Kullig, member of the vdp’s Management Board, commented.

Pleasing development on the market for Sustainable Pfandbriefe

The market segment for Sustainable Pfandbriefe has seen a positive development since the first issue was placed by a vdp member bank in 2014. So far, 14 Pfandbrief banks have Green and Social Pfandbriefe outstanding with a total volume of EUR 28.5 billion. Of this, Green Pfandbriefe account for EUR 23.6 billion and Social Pfandbriefe for EUR 4.9 billion. Thus, Sustainable Pfandbriefe currently make up just over 7% of the total volume of outstanding Pfandbriefe. By comparison, they today represent a share of around 20% of newly issued Pfandbriefe in benchmark format (at least EUR 500 million).

 “The pleasing growth seen in the segment for Sustainable Pfandbriefe demonstrates, moreover, how successful market-oriented models can be if they promote practicable sustainable financing and offer investors the investment opportunities they are looking for,” said Kullig

After strong start to the year, capital market experts expect greater investor reticence in second half of 2024

The sentiment with regard to sales of Pfandbriefe and unsecured bank bonds has brightened significantly in the last six months, according to the results of the fourth survey conducted by the Association of German Pfandbrief Banks (vdp) among its member banks’ capital market experts. Although the scores for Pfandbriefe and unsecured bank bonds developed positively, they remain in slightly negative territory for both asset classes.

Compared with the December 2023 survey results, the sentiment values in early summer proved to be significantly better. Thus, the capital market experts awarded 45 points for investor demand both over the last six months and at the current margin. By contrast, a score of only -3 points was calculated for expected demand in the coming six months. The hitherto strong demand for Pfandbriefe is also reflected in the score of currently 43 points for the over-subscription level for Pfandbriefe, while the score for the next six months is 11 points.

The results of the survey, which is conducted twice a year, are published under the heading “vdp Issuance Climate”. The sentiment indicator ranges from -100 to +100 points, and currently shows only a slightly gloomy sentiment with a score of -12 points. There is very little difference between the scores for Pfandbriefe (-11) and unsecured bank bonds (-14). Compared with the December 2023 survey, the overall score improved by 10 points, with the individual score for Pfandbriefe up by 12 points and the individual score for unsecured bank bonds up by 7 points.

Scoring                                     June 2024      Dec. 2023      June 2023
Score for Pfandbriefe:                         -11           -23            -14
Score for unsecured bank bonds:     -14           -21            -29
Overall score:                                      -12           -22            -21

The main driver of the slightly negative scores is the general trend in interest rates (-53 points after -24 points in December 2023). Expectations of lower yields are again likely to lead to a certain degree of reticence among investors going forward. In this context, the influence of the lending business to be refinanced remains well in negative territory at -32 points. The capital market experts surveyed expect the weak demand for property finance to continue to put a damper on the lending business to be refinanced over the next six months. That said, there is a 21-point improvement compared with the December 2023 survey. The capital market experts likewise take a less negative view than in December 2023 (-24 points) of the general rating trend for the banking sector. The corresponding score has improved by 15 points to currently -9.

Market for unsecured bank bonds expected to cool down

For the last six months and the present, the vdp member banks reported strong and very strong investor demand respectively for unsecured bank bonds. A score of 29 points was calculated for the last six months, and a current score of 48 points. Given that the spreads on unsecured bank bonds have fallen heavily in the meantime, the score of -32 points shows that experts are considerably more skeptical about their expectations with regard to investor demand in the coming six months.

“The increase in interest rates and the attractive spreads versus Bunds and swaps led to very strong demand for Pfandbriefe in the first five months of the new year. It is pleasing to note that longer-dated Pfandbriefe, which are important for long-term property financing, were again in good demand,”

said Sascha Kullig, Management Board member at the vdp, to sum up the developments of the past six months.

Good start to the new year for Pfandbrief market

In the first five months of 2024, the vdp member banks issued Pfandbriefe with a total volume of just under EUR 30.1 billion. This is nearly 10% above the volume placed in the corresponding period one year before. Of the new Pfandbriefe issued, Mortgage Pfandbriefe accounted for EUR 23.0 billion and Public Pfandbriefe for EUR 6.6 billion. Compared with the corresponding period one year before, this represents an increase of 3% for Mortgage Pfandbriefe and 26% for Public Pfandbriefe. In addition, Ship Pfandbriefe were placed with a volume of EUR 500 million (corresponding period one year before: zero).
It was noticeable that investors again added a substantial volume of longer-dated Pfandbriefe to their portfolios. The vdp considers this to be a reflection of the fundamental trust that investors have in the outstanding quality of the German Pfandbrief.

We have seen considerable improvements in most drivers of demand. It is not surprising that, following the strong first five months of 2024, somewhat more investor reticence is again expected,” said 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.