Cheap refinancing for Pfandbrief banks, but growing competition

German real estate lender Berlin Hyp has been tapping the markets heavily this year to refinance its lending, and in October issued its third €500m mortgage Pfandbrief since April – which, like its predecessors, was heavily (2.4 times) oversubscibed.

The offering follows Berlin Hyp's first Green Pfandbrief in April with a volume of €500m and a term of seven years, and a three-year Pfandbrief issued in July for a further €500m. The bank also issued an unsecured bank debenture in mid-January of this year for €750m.

Lead-managed by Commerzbank, Deka, HSBC and UniCredit, with Bankhaus Lampe and WGZ Bank as co-leads, the latest issue reached over €1.2bn from more than 40 different investors and was closed within an hour. The five-year bond was priced at 10 basis points below mid-swap and pays an interest coupon of 0.125%.

Those buying the bond were 88% German investors, Scandinavia (5%) and Switzerland (4%), with banks and saving banks making up the largest investor group at 51% of the total.

According to Gero Bergmann, board member at Berlin Hyp with responsibility for capital markets, "Although the issue volumes on the covered bond market in 2015 were higher than they have been for years, we once again generated strong demand with this latest issue and attracted numerous investors for our bond in the present climate of sustained low interest rates."

Separately, the bank also placed a €122m real estate debenture issued by LEG Wohnungsbau Rheinland, a subsidiary of listed Düsseldorf-based LEG Immobilien. The debenture is secured on 70 individual buildings with 4,100 residential and 20 commercial units in North Rhine-Westphalia, mainly in an area just south of Duisburg.

23 local Sparkassen (savings banks) are participating in the debenture, taking up €59m of the loan over a 12-year period. The property debenture ("Immoschuldschein") is an instrument which combines elements of classical consortium financing and loan debentures. The instrument gives Sparkassen the opportunity to partake in property lending from €1m upwards, with Berlin Hyp holding a majority of more than 50% of the loan and handling all the servicing.

Minimal interest, but growing competition

The minimal interest payable on the jumbo Pfandbrief of 0.125% shows just how cheaply German bank can refinance themselves to meet the enormous demand for real estate lending in the current climate.

Earlier in the month Münchner Hyp likewise placed its fourth mortgage Pfandbrief this year, a €500m bond with a 6-year duration and an annual interest coupon of 0.375%. A seven-year Pfandbrief issued earlier this year by Deutsche Hypo paying a coupon of 0.125% was FOUR times over-subscribed.

It would be easy to assume that, under these conditions, the banks have the playing field all too themselves. But the market has seen the rise of a lot of fresh competition since the onset of the financial crisis. With pension funds and insurance companies muscling in on the market, real estate investors have a wider choice of financing partner. AXA REIM, for example, the property investment subsidiary of the giant French insurer, has built up a platform of €11.3bn for commercial property lending over the last three years.

Occupational pension funds, smaller insurance companies, and even non-profit foundations are increasingly looking to allocate part of their assets to debt funds, while Germany's investment companies or KAG's are very active in lending. Dekabank, the funds subsidiary of the Sparkassen-Finanzgruppe, has aplatform which is now issuing new lending of more than €2.5bn a year.

All this extra competition has led to a halving of margins on bank lending over the last three years. Several big lending banks, such as Deutsche Hypo, have actually decreased their new business lending in the past year, because of the lack of quality of many of the new business proposals.

With the market for 'core' office and retail properties in Germany largely saturated, investors are moving ever further afield to look for value – out into the provinces and the smaller towns where the big Pfandbrief-issuing banks have less lending experience and local knowledge. This is more frequently the turf that the local Sparkassen can claim as their regions of competence.

Hence the big German banks are looking overseas for their expansion and for the still-achievable higher margins. The volume of such lending rose between 2013 and 2014 by 16.2% to €22.97bn, headed by Aareal Bank and Helaba Bank.

Aareal Bank has always been more overseas-oriented than its peers, and fully 80% of its €33.1bn loan book is for non-German property. Helaba has 48% or €17.5bn of its total loan book of €36.5bn lent on foreign property. The average for most of the other Pfandbrief-issuing banks is between 20% and 33% - with a rising tendency, according to a recent study by the IREBS institute.