Pfandbrief-issuing banks feeling pressure of rental, repayment shortfalls

Germany’s Pfandbrief-issuing banks are likely to have to re-schedule a good chunk of their lending, as failed rent payments due to the coronavirus will take a toll on repayments on their lending, said their association the VdP Verband deutscher Pfandbriefbanken in their recent annual press conference with journalists (held for the first time as telephone event).

Although the figures presented largely related to past business written in 2019, the warnings given for current lending were clear, given events over the past two months. There have, in fact, been no new Pfandbrief issues since the outbreak of the coronavirus two months age.

Last year, VdP member banks collectively underwrote €167.15 bn of property financing, about the same as the previous year’s €167.38 bn. Financing of residential property rose by 4.3% to €97.84 bn from €93.83 bn, while financing of commercial property fell 5.8% from €73.55 bn to €69.31 bn.

Louis Hagen, president of the VdP, put the fall in commercial property financing down to the weakness of the market for retail lending, which plunged by more than a quarter to €15 bn. Office lending rose by 5.9% to €38.7 bn (giving it a 56% market share), and for industrial and logistics property by 19.9% to €2.2 bn.

All together in the residential sector lending rose by 4.9% to now stand at €877.8 bn, giving it a 5.1% share of total bank lending, just ahead of commercial property financing at 4.7%.

Hagen said the recent decision to defer consumer loans repayments by a possible three months in response to coronavirus was appropriate, while stressing “but not interest-free”. He spoke out against any extension of the deferral conditions applying to companies, and closer supervision by the financial watchdogs to prevent loans going bad. 

He also said the member banks needed further breaks from the European Central Bank and the Bundesbank in terms of their access to liquidity to fulfill their social and economic obligations. The role of the ECB as a buyer of German covered bonds remained decisive, he said, while the issuing of Pfandbriefe by the banks remained a key feature for their future refinancing, with the rise on risk premiums on Pfandbriefe remaining ‘moderate’.

The Pfandbrief-issuing banks are bracing themselves for lower demand for property financing, and consider price falls likely, although there is no evidence of this yet, said Hagen, whose day job is chairman of Münchener Hypothekenbank. “The uncertainty about the direct and indirect consequences of the Covid-19 crisis on the real estate market is palpable.”

However, residential property prices could continue to rise through 2022, say several bank economists, if investors flee to the safety of housing and urban immigration continues, while new building supply continues to stagnate. Lending in the residential sector jumped in 2019, adding to further dynamic in house prices, but Hagen suggested that that lending would be tightened somewhat this year. In the commercial lending sector, existing deals are being processed although it’s not so clear how this will develop, he said.