Pfandbrief banks prove resilient in difficult market setting


Berlin, 22 April 2024

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

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

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


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

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

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

Development of real estate financing business

Price decline greater for commercial properties than for residential properties 

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

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

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

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

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

Pfandbrief banks grant property loans totalling EUR 110 billion

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

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

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

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

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

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

Current regulatory issues

vdp calls for regulatory moratorium and review of existing measures

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

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

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

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

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

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


Development of Pfandbrief business

Volume of Pfandbriefe outstanding rises to over EUR 400 billion

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

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

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

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

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

Volume of sustainable Pfandbriefe outstanding up by 36%

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


vdp membership development

Three new member banks join the vdp

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