German government approves changes to Pfandbrief Act

Rating agency Fitch was one of the quickest out of the starting block this week to signal its approval of changes in Germany’s Pfandbrief Act, which were adopted by the German government this week as part of a series of measures to give investors a “fuller picture of market risk”.

The amendment to Article 28 of the Pfandbrief Act, which sets out Pfandbrief issuers’ quarterly disclosure obligations, will require issuers to publish the proportion of fixed rate cover pool assets and covered bonds, as well as the net present value of the difference between assets and liabilities of the same foreign currency, to make investors aware of possible currency mismatches.

The amendment also says that the weighted average seasoning of real estate loans in the cover pool and the share of ECB eligible cover assets should be disclosed, and requires more detailed disclosure of substitute assets, including a breakdown by country. It also stipulates a finer breakdown of the maturities of assets and liabilities into six-month bands for the upcoming two years.

While an improvement, given the medium and long-term nature of much Pfandbrief issuance, many outstanding issues have more than two years until maturity, said Fitch in a statement addressing the amendments from its Frankfurt office.

However, the rating agency also criticised the lack of provision for loan-to-value disclosure on mortgage assets, while acknowledging the practical difficulties in, for example, disentangling complex arrangements where more than one loan to more than one borrower is secure on the same property.

While the Pfandbrief Act already prohibits the inclusion in the cover pool of loans or loan parts with more than 60% LTV based on mortgage lending values, the rating agency said it believed the Act should go further in providing more details on LTVs to enable investors to make more direct comparisons between mortgage Pfandbrief programmes.

Meanwhile, Fitch also issued a statement earlier this month on the question of a real estate bubble in Germany. The agency commented, “Fitch Ratings does not consider there to be an asset bubble across Germany for either residential or commercial real estate assets. Property prices and rents have generally moved in line with economic fundamentals. Only in metropolitan areas, particularly Berlin and Munich, have price increases been seen to exceed fundamentals such as the relative economic stability of Germany, net migration and low construction activity.”

The agency said it foresees further residential property price increases across Germany, and particularly sharply in core property markets in the short- to medium-term, where investor demand is expected to remain strong.  According to Markus Schmitt, associate director in Fitch’s Financial Institutions group, “In Germany's core locations, residential property net rental yields (net cold rent after operating expenses/purchase price) of up to 400 basis points per year are still achievable, although we see great variances between different locations. However, we expect net rental yields to fall further due to strong investor demand and a more moderate economic outlook, potentially constraining rental growth.”