Pfandbrief banks increase dependency on property financing

Germany’s Pfandbrief-issuing banks are relying more and more on residential property financing to underpin their covered bond issuance, as the overall market for Pfandbriefe continues to fall in a long-term trend, said the VdP (Association of Pfandbrief-issuing banks) at its recent annual press conference.

The withdrawal of banks from public sector financing has seen the number of covered bond issues halving in volume over the last ten years, to reach its lowest level since 1993. Although the association’s member banks saw overall new property mortgage financing shrink last year by 4% to €92.5bn, new public sector financing commitments plunged even more, by a further 18% to €24bn. The volume of public sector Pfandbriefe in circulation was €858m in 2000, while it was down to a mere €300m at the end of 2012, said association CEO Jens Tolckmitt, to illustrate the relative shift to property financing (plus shipping and aviation).

Presenting its latest report, the association dismissed fears of a property bubble emerging in the residential sector, stressing its view that the market had strong demand fundamentals, and there was little evidence that banks were relaxing their lending standards.

The VdP expects Pfandbrief issuances in commercial real estate to reach last year’s level in both Germany and abroad, with investors focusing on markets less affected by property crises. With public sector covered bond issuance falling further, the association predicts overall Pfandbrief volumes of around €60bn to be level with last year, with two-thirds of issues comprising mortgage Pfandbriefe. Total securities in circulation will fall below €500bn due to a large number of maturities.

Five new Pfandbrief issuers entered the market, raising the number to 72, and vdp expects more new entrants this year. “We see a further growing interest from domestic and international houses in the Pfandbrief,” said Tolckmitt. He also noted a definite international trend towards refinancing through covered bonds modelled after the Pfandbrief.