Pfandbriefe: On the German real estate market

Expert's view

by Hansjoerg Patzschke, Senior Country Manager, Germany and CEO of Natixis Pfandbriefbank AG.

In Germany, the real estate sector has been historically dominated by the use of long-term financings such as Pfandbriefe, covered bonds issued by mortgage banks and banks with a special Pfandbrief licence. These instruments are often considered to be amongst the safest debt securities in what is a diverse private market.

Covered bonds: a common structure for German debt securities

This form of debt security is typical across European markets. Securities are issued by banks and financial institutions and subsequently collateralized against pools of real assets. In the case of default by the issuer, the bond is ‘covered’ by the secured assets, such as commercial or residential real estate.

Germany has the largest market for such securities, taking the form of the Pfandbriefe. These instruments make up the largest portion of the German debt market, yielding a premium over domestic sovereign bonds.

Multiple entities can issue covered bonds in Germany, which ranges from public sector banks, private mortgage banks and financial institutions originating mortgages for ships or aircrafts.

Ten years of buoyant growth, with significant capital inflows

Following the bankruptcy of Lehman Brothers in September 2008, an already shaky global economy plunged further into recession. The subsequent global financial crisis preceded what has been a decade of significant capital inflows into the German real estate market, with €120bn invested in residential real estate and €380bn into commercial property. This unprecedented surge in demand has boosted asset values considerably, matched with some of Germany’s biggest cities emerging as diverse, modern hubs for inventive industries and the knowledge-based economy.

Berlin represents a particularly interesting story. Since the early 2000s, strong positive net immigration has helped the city achieve impressive growth, with an influx of creative minds Berlin now produces hundreds of new start-ups annually, demonstrating the relevance of the capital as Germany’s innovative technological and creative hub.

Robust growth of demand in the office sector

Continued economic growth and the expansion of start-up companies is driving the demand for office space across the cities. However, with some clouds appearing on the horizon, such as the U.S-China trade conflict and the ongoing Brexit negotiations, the outlook is somewhat subdued.

However, employment is expected to grow further this year, significant new vacancies will be created across German cities. Rents are expected to moderately increase across the top cities, with the long-term demand for space likely to outstrip the building capabilities. Consequently, overcapacities in the German office sector are somewhat unlikely, the ongoing sectorial expansion does not seem likely to be ending any time soon.

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