On 10 and 11 October 2024, the covered bond community looked to Budapest, where the 26th Central European Covered Bond Conference (CECBC) took place.

Around 80 covered bond specialists from across Europe, including analysts and representatives from banks, rating agencies and supervisory authorities, attended the event. The aim of the annual CECBC is to enable a small group of experts to exchange views on fundamental aspects of covered bond legislation and supervisory issues. This year’s event was organised by the vdp in cooperation with the Hungarian Banking Association and the National Bank of Hungary.

The following current topics were discussed in four different panels:

• CBD Call for Advice (chaired by Sascha Kullig, Member of the vdp Management Board): The results of the harmonisation to date were explained, along with the question of whether further harmonisation steps are necessary for covered bonds.
• Green Covered Bonds / ESG (chaired by Gyula Nagy, MHB Mortgage Bank, Budapest). Here, too, the main topic was the EU regulation, in particular the question of what is ‘green’. There was agreement that, for example, there are different needs in the various member states, for example, when it comes to building renovations.
• Cross Border Cover Assets (chaired by Viktor Juhász, Unicredit Bank Budapest, and Dr Tim Lassen, Member of the vdp Management Board). Here it became clear that there is great interest in smaller markets in expanding the basis for covered bonds through foreign cover business. The various legal and regulatory obstacles were discussed.
• Property Value (chaired by Annett Wünsche, Member of the vdp Management Board) on various national approaches to implementing Property Value and on the (possible) impact on the Pfandbrief.

The next CECBC – which will be the 27th event of its kind – is expected to take place in Berlin at the beginning of November 2025. The vdp has already started preparations.

vdp Real Estate Forum 2024 highlights the residential property market

The vdp Real Estate Forum, held in Berlin on 5 September 2024, provided information on trends in the residential property market, with a strong focus on the prospects for creating affordable housing. Almost 100 guests attended the event in Berlin in person. Another approximately 400 participants used the virtual access.

In his welcoming address, vdp Chief Executive Jens Tolckmitt emphasised that housing is not just a market issue, but is, first and foremost, a socio-political challenge. Not enough living space is being built in Germany, and there is a particular lack of affordable housing. Especially in large cities, purchasing residential property has become wishful thinking for a great many households. At the same time, it is a dramatic fact that more and more people can no longer afford the rents, which are likely to continue rising. This has the potential to cause social tension and plays into the hands of extremist parties, as has happened in two state elections. The federal government is well aware of the problem, he said, and in 2022 it established the ‘Alliance for Affordable Housing’ and finally set up a dedicated ministry with a committed minister at its helm. The majority of the measures adopted by the ministry so far are constructive, but not enough to create new living space on the scale needed. More support is necessary, especially financial support, from the federal and state governments.

Afterwards, Thomas Hofer, vdp Head of Real Estate Market and Domestic Real Estate Finance, gave an overview of the demand for residential real estate loans. He said that demand had fallen significantly from mid-2022 onwards as a result of the sharp rise in interest rates. He added that large sections of the middle-income groups had ceased to be demanders due to higher property prices and higher interest rates. There are now positive signs, he said, as interest rates on loans had stabilised and rising wages and lower inflation would increase households’ spending power. Rising rents are also making the purchase of residential property more attractive again. Accordingly, demand for financing is increasing again.

Prof. Dr. Michael Voigtländer from the German Economic Institute (IW) highlighted the topic ‘Shortage of flats’. In his opinion, the shortage of skilled workers and the low productivity of the construction industry are among the reasons for the low number of new residential buildings. Since the supply of housing in Germany is already far too low and the net immigration requirement is between 400,000 and 500,000 people per year, it is imperative to increase productivity in the entire construction value chain. This could be achieved, for example, by adding storeys to buildings, but above all by increasing the use of serial construction. He cited Denmark as an example, where the proportion of flats built using serial production methods is now 40 per cent. So far, excessive regulation, low economies of scale in construction and legal uncertainties regarding innovations have prevented the necessary progress in production. It is important, and this also applies to ESG regulation, to focus on objectives and not on standards, said Prof. Voigtländer.

Fabian Viehrig, head of construction and technology at the GdW National Federation of German Housing and Real Estate Enterprises, called for ‘More speed for affordable housing’. He expressed concern that the languishing housing construction and the lack of recovery in building permits could lead to a loss of capacity in the construction industry. This capacity would then be lost forever and would no longer be available when the economy recovered. According to him it is important to develop appropriate concepts that would enable fewer people to build more. In his view, the growing use of serial and modular construction technologies, which would involve the increased use of prefabricated parts, would be expedient. The GdW has developed framework agreements for serial and modular construction for this purpose. Viehrig was convinced that apartments could be built within the framework of these concepts that would require a rent of 14 euros. However, lower rents would only be possible with more financial support from the public sector.

The following panel discussion focused on the question of whether the measures adopted in the Alliance for Affordable Housing are sufficient.

The following guests took part in the discussion:

Sandra Wehrmann, member of the board of degewo,

Christian Schmid, member of the board of Helaba,

Prof. Dr. Michael Voigtländer, German Economic Institute (IW).

They discussed with the moderator Michael Fabricius, real estate editor of WELT.

Wehrmann showed how degewo’s construction output had recently changed. Due to higher interest rates and construction costs and changes in KfW development loans, fewer apartments would be completed in 2025 than this year (1,500 residential units). From 2026 on, a higher number of new apartments can be expected again. Currently, apartments can be completed that require an average rent of 15 euros. However, when making this calculation, it should be noted that degewo would build 50% freely financed and 50% subsidised apartments.

With regard to the development of the German real estate market, Schmid was convinced that prices in many segments were stabilising. However, it should be noted that differentiation is also increasing within asset classes and locations. For good locations and good quality, the bottoming out is recognisable; for residential properties, even higher prices are foreseeable again.

In the discussion, Prof. Voigtländer pointed out the increasingly important role of ESG aspects. He explicitly welcomed the goal of doing without fossil fuels in Germany from 2045 onwards. However, he said that it is now important to focus on the increased use of renewable energy. According to Voigtländer, Germany is ‘subsidising itself to death’ and has ‘lost its way’ when it comes to detailed standards. Now that the goal is set, the paths to achieving it must be clear for market participants.

Wehrmann, who hoped that district heating in particular would become green, as this is where major effects could be achieved, agreed. By contrast, maximum building renovation would have the least effect, with energy consumption decreasing relatively little as a result of such measures. She sees the lack of experts in the construction sector for these topics as a burden for the implementation of energy-related measures in new construction and renovation.

Schmid was highly critical of the ESG regulation. The transformation of real estate from ‘brown’ to ‘green’ is not provided for in practice. Furthermore, there is a lack of innovation in Europe, where small-scale measures are adopted and possible projects such as ‘CO2 storage’ are neglected. Prof. Voigtländer would also like to see a different focus for ESG regulation. Politics and regulation should focus much more on the CO2 price. Sweden, for example, has achieved noticeable success in reducing CO2 with significantly higher prices. The panel agreed with Schmid‘s call to stop talking about insulation all the time and to finally start talking about new technologies for sustainable transformation.

Early repayment charge is permissible under European law / ECJ ruling is welcomed

The Pfandbrief banks welcome today’s decision by the European Court of Justice (ECJ). According to the ruling, the usual method of calculating early repayment charges is permissible under European law.

‘Today’s ECJ ruling is in the interests of all market players – on the one hand, consumers: It strengthens the German fixed-interest culture, which has always guaranteed the stability of the German property and financial market. And secondly, it creates important planning security for credit institutions,’ explained vdp Chief Executive Jens Tolckmitt. ‘It is also pleasing that there is no need for the German legislator to take action following the ECJ ruling.’

Impressions from the 25th Central European Covered Bond Conference in Graz, Austria

On 5 and 6 October 2023 vdp performed the 25th Central European Covered Bond Conference in Raaba-Grambach (near Graz, Austria) in cooperation with Raiffeisen-Landesbank Steiermark. Divided into four panels of 90 minutes each, the event allowed to explain and discuss in detail basic legal issues regarding covered bond (CB) legislation and supervision of CB issuers. Charts showing the legal situation across Europe from both vdp projects on comparison of law regarding security rights over immovable property and Covered Bond Legislation illustrated the pittoreske picture of both fundamental issues and legal details in Europe.

After having worked on the „must-issue“ Covered Bond-Directive (CBD) and interpretation needs in Panel 1, moderated by Jochen Deiss (Treasurer at Raiffeisen-Landesbank Steiermark), three new issues were discussed: Panel 2, moderated by Andras Botos (Head of Law at Hungarian development bank MFB), focused on the way in what legal form CB „law“ develops, and what it means legally that supervision authorities more and more create so-called „soft-law“, what can be debated as being never soft.

Sascha Kullig (Member of the vdp Executive Board) moderated Panel 3 on Green CBs, however with the focus on How to ensure green cover assets? Here, it was shown that a lot of mortgage loan originators (and CB issuers) still struggle to find the right clauses in mortgage loan contracts to create green mortgages and to keep them green. Inexisting data about buildings and data protection rules make it difficult to foresee future legal developments during the lifetime of a long-term mortgage loan.

The item of panel 4, moderated by Andreas Luckow (Deputy Head of Cover Assets at vdp), was touched first time in a CB conference: Building insurance and cover pool. General banking law and CBD expect that buildings are insured against all relevant risks. However, what is relevant and to what extend? And how to ensure that any claim out of any damage would not reduce the security, which is provided by the building as part of the pledged land? Here, the charts of the presentation showed clearly that there a different approaches across Europe to answer this question.

Dr. Otmar Stöcker (Managing Director at vdp) drew a positive conclusion after the close of the event “The aim of the conference series, to provide all participants with valuable content, was once again achieved.”

vdp Immobilienforum 2023 provides expert information on trends in the office property market and New Work

The Immobilienforum of the Association of German Pfandbrief Banks (vdp) on September 11th 2023 in Berlin provided information on trends in the market for office properties and gave insights into the concept of “New Work”. Almost 70 guests attended the event in Berlin. About 160 participants took advantage of the digital access.

Jens Tolckmitt,
vdp Chief Executive, outlined the general conditions for the further development of the office property market in his welcoming address. He said that the uncertain macroeconomic environment in particular was currently having a negative impact. The German economy is suffering, among other things, from higher energy prices, high taxes, an increasing shortage of skilled workers and crushing bureaucracy. In this environment, the office property market is showing signs of strain. Above all, the sharp rise in interest rates has led to unavoidable price adjustments. Planning uncertainty was also caused by the often unsuccessful political agenda for more sustainability and the question of future trends in home offices. Tolckmitt cited the development of office rents, which are rising dynamically and indicate that the office real estate market could gradually pick up again, as a glimmer of hope. However, he said that this would require a significant reduction in the uncertainties surrounding future economic developments.

In her outlook for the office property market,
Hildegard Höhlich
from the vdp gave a detailed overview of the user and investment market for office properties. Companies continue to put their space requirements and the corresponding working environment concepts to the test. Future space requirements are still unresolved in many companies. Against the background of the uncertain economic development, a further increase in vacancies is to be expected. Uncertainties exist on the investment market with regard to the future wishes of users and their space requirements. Users and investors are focusing on ESG-compliant properties in good and very good locations. These high location and quality requirements are leading to an increasing spread in rental and purchase price development. Overall, a further decline in office property prices is expected in the coming months.

An insight into the new world of work (“New Work”) was provided by
Deborah Reicherts,
Head of New York and Workplace Transformation at LBBW Corporate Real Estate Management. She was convinced that offices would continue to be justified, but that new concepts would be necessary to attract talent, lure employees back into offices and create a platform for communication. In her view, the office of the future will be half the size, but twice as cool! She used a number of examples to show how office environments can be developed into a place of encounter and how space efficiency can be increased at the same time.

Criticism of extent of regulation

The ensuing panel discussion centered on how the space and ESG transformation in office real estate can succeed and be financed. The guests

Maria Teresa Dreo-Tempsch, member of the Board of Management of Berlin Hyp,

Sven Carstensen, Member of the Board of Bulwiengesa,

Frank Müller-Rosentritt, Member of the Bundestag and FDP spokesman on banks in the Finance Committee,

Jochen Schenk, Chairman of the Board of Real I.S. and Vice President of the German Property Federation (ZIA),

discussed with the moderator

Michael Fabricius, real estate editor of the WELT.

The panelists agreed that the current ESG regulation is not suitable for achieving the German government’s climate goals of ensuring climate neutrality by 2045. The regulatory focus is often far too much on energy-optimized new buildings, while the major lever is the energy optimization of existing buildings. In the existing and also in new buildings, the transformation would not succeed without an expansion of the provision of “green” energy and also not overnight. Speaking of transformation, there should be more focus on promoting the transformation of previously “brown” properties into “green” properties. In addition, there are generally too many inconsistencies within the various ESG regulations, which, on top of that, usually do not result in a CO2 reduction. For example, the EU taxonomy leads to a misallocation of capital without achieving success in terms of energy. In general, ESG regulation is too overambitious and there is a major conflict between ESG targets and their affordability. For example, there are significant differences between the top 7 cities and rural areas, where more than 70% of office space is located. Energy optimization measures that could possibly be implemented in the top 7 cities due to the high rents achievable there are not feasible outside the major cities, for example, with rents of 8 euros.

vdp publishes comprehensive database of the Round Table Covered Bond Legislation

The Association of German Pfandbrief Banks (vdp) now offers free access to the extensive database of the “Round Table Covered Bond Legislation”. Investors, experts, rating agencies, analysts and interested parties can thus access comprehensive information on covered bond legislation in Europe without any costs.

The Round Table Covered Bond Legislation was launched by the vdp in 2010 in response to in-depth questions surrounding the legal framework of covered bonds in the context of the financial crisis. The initiative brings together leading covered bond analysts and bank lawyers from various European countries to provide qualified answers to questions on the legal comparison of national covered bond laws. The results of this round table are fed into a database and presented in the form of colour-coded maps. In this way, an effective comparison of laws is made possible.

The Round Table database contains over 337 questions and answers for more than 20 countries. In a first step, 204 of them for 15 countries will now be published. In parallel, the Round Table experts are working on refining the remaining questions and answers and making them as comprehensible as possible.

“Our database has already proven to be a valuable source of information for bank supervisors, experts and developers of new covered bond legislation in the past. By opening the database, we are expanding access to this valuable knowledge to a broader public,” explained vdp Managing Director Dr. Otmar Stöcker.

Click here to access the database.

The Association of German Pfandbrief Banks (vdp) is celebrating its 70th anniversary. On March 25, 1953, the present-day vdp was founded as the Association of Private Mortgage Banks.

“However, we as an association don’t feel 70 years old, but 70 years young. We feel the way the German Pfandbrief – which has been around for much longer, namely more than 250 years – presents itself on a daily basis: agile, modern and always up-to-date, yet aware of its tradition,” Jens Tolckmitt, the vdp’s Chief Executive, pointed out.

In 1953 the association’s office and member banks pledged to work together to achieve the greatest possible security and quality for the Pfandbrief, and marketed it jointly to investors worldwide. The association’s membership initially consisted of only specialized institutions, but the introduction of the Pfandbrief Act in 2005 led to a fundamental change. All credit institutions were permitted in principle to engage in Pfandbrief business provided they obtained the necessary additional licence and subjected themselves to supervision by the Federal Financial Supervisory Authority (BaFin). At that time the association, which changed its name to vdp in 2005, lobbied vigorously for the stringent rules of the Mortgage Bank Act to be incorporated into the new Pfandbrief Act. The Pfandbrief’s success has proven the vdp right. Credit institutions from all pillars of the German banking industry today use the Pfandbrief as a strategic refinancing instrument. Their joint product, the Pfandbrief, enjoys the highest regard worldwide and is the quality leader within the covered bond family. Its stability and usability at any time and in every crisis since 2008 have played a big part in this success story.

The success of the Pfandbrief is also reflected within the vdp itself, which today has 50 member banks. Together, they account for around 96% of Pfandbriefe outstanding.

The present-day vdp employs around 30 staff members in Berlin and Brussels and operates four subsidiaries to support the member banks in all the Pfandbrief-related aspects of their business.

“We wish to thank our member banks and friends of the Pfandbrief for their support and look forward, with them, to the coming decades in the service of the Pfandbrief,” Tolckmitt remarked.

vdp criticizes activation of the capital buffers and warns of adverse effects

On the occasion of their becoming mandatory as from February 1, 2023, the Association of German Pfandbrief Banks (vdp) renews its criticism of the two capital buffers: the countercyclical capital buffer as well as the specific systemic risk buffer for the residential real estate sector.

“In particular, their amount and the timing of their activation are inappropriate,” Jens Tolckmitt, the vdp’s Chief Executive, emphasized: “The general data on the residential real estate financing market already argued against this measure when the capital buffers were announced. In the current environment, the remaining justifications for introducing them likewise cease to apply.”

Tolckmitt cited as examples the turnaround in real estate prices and in the growth of new lending volumes. The market, he pointed out, has thus anticipated what BaFin (Federal Financial Supervisory Authority) is now trying to curb.

Starting on February 1, 2023, German banks will be required to maintain a countercyclical capital buffer of 0.75% – based on their total financing business – and, additionally, a sector-specific risk buffer of 2% – based on their residential real estate financing business. According to the Deutsche Bundesbank, these macroprudential measures will increase the banks’ need for Common Equity Tier 1 capital by around EUR 22 billion. This will inevitably restrict the banks’ lending opportunities. It is especially incomprehensible that an additional capital charge of 2.75% will henceforth be imposed on precisely the banks’ low-risk residential real estate financing business.

“This will make it harder for banks to carry out their core function as providers of finance to the real economy,” Tolckmitt stressed. “Regulation should enable banks to supply the necessary funds – not act as an obstacle.”

He went on to say that banks that are capable of functioning efficiently are, moreover, indispensable to realize major political projects such as the creation of affordable housing and the sustainable transformation of the economy. Tolckmitt therefore appealed to the Financial Stability Committee to take due account of the current economic setting and the changing risk situation in real estate financing when it next reviews the appropriateness of the capital buffers.

BaFin is, to our knowledge, examining possibilities to adjust measures through Mortgage Lending Value Regulation amendment

Most of the Covid-19-related measures (FAQ) taken by the Federal Financial Supervisory Authority (BaFin) expired on June 30, 2022. This also affects the rule allowing the inclusion of real estate loans in cover based on reports/valuations conducted without inspecting the interior and/or exterior of a property. Under this rule, it was possible to dispense with inspecting the interior and exterior under certain conditions. In particular, markdowns had to be applied to the mortgage lending value. These could be reduced when a property was inspected by video transmission, and dispensed with completely in the small loan sector.
In the opinion of BaFin, an inspection carried out by video transmission contradicts the currently valid version of the Mortgage Lending Value Regulation (BelWertV).

For this reason BaFin is, to our knowledge, sounding out possibilities to adjust this rule within the scope of work under way at present on amending the BelWertV.

Given the stringent contact and travel restrictions in force during the Covid-19 pandemic, it was no longer possible to conduct regular inspections in the customary manner as part of the property valuation process. However, the market quickly found an alternative in the form of video viewings.

In order to conduct a video viewing, the customer (borrower) needs a smartphone or tablet with the camera, microphone and geolocation activated, as well as an internet connection.

Depending on the provider, an app has to be installed on the smartphone or tablet before beginning. Following specific instructions, experienced and qualified staff from specialised service providers commissioned by the financing bank actively guide the customer (borrower) through the property. The viewer creates the necessary photo documentation by taking screenshots of relevant features of the property during the viewing. All the relevant information on the property and its surroundings as well as on the scope of the viewing are clearly and comprehensibly recorded in a viewing report.

The vdp member banks rate video viewings favourably, expressing their satisfaction with the service in terms of quality, stability, functionality and data security. The Commerzbank describes its experiences with video viewings in an interview in the latest edition of the vdp’s QUARTERLY magazine.

vdp comments on yesterday’s ECB decision and calls for further steps

The Association of German Pfandbrief Banks (vdp) welcomes yesterday’s decision by the ECB, but at the same time urges it to go even further:

“It is good that the ECB is now going to roll back its bond purchases faster than originally planned. However, it still has not specified a definitive end date for the APP,” vdp’s Chief Executive, Jens Tolckmitt, noted critically.

Having already decided in recent months to make purchases under the Pandemic Emergency Purchase Programme (PEPP) only until the end of March of this year, it decided yesterday to reduce the volume of purchases under the conventional Asset Purchase Programme (AAP) more quickly than initially planned. Specifically, it now plans to double the volume to EUR 40 billion only during April (no longer during the entire second quarter), to acquire EUR 30 billion of additional securities in May (which it had originally planned to do over the entire third quarter) and to reduce the purchase volume back down to EUR 20 billion as originally planned as early as June (instead of holding off on this until after the third quarter). It is still uncertain whether the APP will be maintained at this level in the third quarter of this year or, indeed, possibly terminated. At any rate, ECB President Christine Lagarde announced that an interest-rate hike is possible in the third quarter after the bond purchases end.

But even if the PEPP is about to expire soon, and with the APP possibly expiring in the autumn, that does not mean that the ECB will no longer be the main buyer of securities, inasmuch as the money from maturing PEPP securities, for example, will be reinvested at least until the end of 2024. The same is to be expected if the APP is terminated. For the third and fourth quarters of 2022 alone, APP maturities of around EUR 16 billion will be available for reinvestment.

“This latest step by the ECB could now actually be the beginning of the end of ultra-loose monetary policy. But many additional steps still remain as it is clear that, even after the PEPP and APP are officially ended, for some time the ECB will continue to be the most important market player, as money from maturing securities will be reinvested over the next few years, at a minimum. As a result, over the medium term, there will be no change in the distorted yield environment we have seen since the inception of the purchase programme in 2009,” emphasised Tolckmitt.