vdp Issuance Climate: Increase in property lending business to coincide with pick-up in demand for Pfandbriefe in 2025

Berlin, December 20, 2024

• Capital market experts anticipate growing reticence in the issuance of unsecured bank bonds

The outlook for Pfandbrief sales in the coming six months is a positive one. That is the finding of the fifth survey conducted by the Association of German Pfandbrief Banks (vdp) among its member banks’ capital market experts. They expect an improvement in demand for Pfandbriefe (score +21 points) and, at the same time, an increase in property lending business to be refinanced (score +33 points).

The overall score for the vdp Issuance Climate, which gauges the sentiment in the market for Pfandbriefe and the capital market for the last six months, the present, and the coming six months, is in slightly negative territory, as in the previous survey of June of this year. The individual sub-scores for both Pfandbriefe and unsecured bank bonds are likewise preceded by a minus sign.

Scores above the December 2023 results

The results of the survey, which is carried out twice a year, are published under the heading “vdp Issuance Climate”. The sentiment indicator ranges from -100 to +100 points, and currently shows a slightly gloomy sentiment with a score of -14 points. The difference between the scores for Pfandbriefe (-18) and unsecured bank bonds (-8) is again a little wider than in June 2024. Compared with the survey of early summer, the overall score slipped by 2 points, with the sub-score for Pfandbriefe down by 7 points, whereas the sub-score for unsecured bank bonds improved by 6 points. It is pleasing to note that all three scores are currently better than in December 2023.

Worsening sentiment in the last six months

The sentiment worsened appreciably in the last six months in terms of Pfandbrief sales, with capital market experts giving a score of -43 points for investor demand for Pfandbriefe in the last six months. Their assessment of the present situation is somewhat better, with a score of -35 points. Regarding sales of unsecured bank bonds, the sentiment brightened considerably, showing a score of +27 points for the last six months and +42 points for the present.

The main driver of the Pfandbrief scores, which are still slightly in negative territory, is the current asset-swap level (score -83), which provides information on refinancing costs. Only a slight easing is expected here over the next six months, as is reflected in the score of -72.

Interest rate developments in the next six months could become something of a burden for both Pfandbriefe and unsecured bank bonds, according to the forecast by the surveyed capital market experts (score of -70 in each case). That said, opinions differ considerably on the level of the deposit rate for the next year. While some experts only expect interest rate cuts of not more than 75 basis points, others envisage interest rate cuts in excess of 150 basis points over the year ahead.

Strong Pfandbrief sales in 2024

In the first 11 months of 2024 the vdp member banks issued Pfandbriefe with a total volume of EUR 50.2 bn. Of this total, mortgage Pfandbriefe accounted for just over EUR 37 bn, public Pfandbriefe for EUR 12.4 bn, and ship Pfandbriefe for just under EUR 800 million. With that, the issue volume was 12% below the very high figure reported one year earlier, yet was slightly above the member banks’ planned figure for 2024 (just under EUR 50 bn). It was pleasing to note in this context that – unlike in 2023 – longer-dated Pfandbriefe could also be placed again this year due, amongst other things, to the more normalized yield curve.

Somewhat lower demand likely for unsecured bonds going forward

As in the first half of 2024, the vdp member banks reported also for the last six months and for the present stable and strong investor demand respectively for unsecured bank bonds. A score of +27 points was calculated for the last six months, and of even +42 points for the present. In view of the sharp drop in spreads on unsecured bank bonds in the meantime, expectations are considerably more skeptical about investor demand in the coming six months, with a score of 0 points.

“The strong demand for unsecured bank bonds in 2024 shows the confidence investors place in the credit quality of the issuing banks, which prove their resilience even in times of difficult property markets,” commented Sascha Kullig, Management Board member at the vdp.

Pfandbrief market likely to grow further in 2025

Looking ahead to 2025, the vdp member banks expect the Pfandbrief market to see further growth. Planned new issues total EUR 49.4 bn as against maturities totaling EUR 45.8 bn. The expected volume of new mortgage Pfandbriefe is stated at EUR 40.3 bn, new public Pfandbriefe at EUR 8.6 bn, and new ship Pfandbriefe at EUR 0.5 bn. Thus, the volume of outstanding Pfandbriefe, which has risen continuously since 2019, is set to increase further in 2025. As at end-September the volume of outstanding Pfandbriefe came to around EUR 402.5 bn.

“Despite a number of negative factors, robust demand for Pfandbriefe is expected for the next six months. Moderate growth in lending will likely give rise to a corresponding need for issuing activity,” Kullig remarked.

Methodology

Each survey comprises an assessment of the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation. These assessments determine separate scores for Pfandbriefe and unsecured bank bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores (maximum -100) indicate that the issuance environment is less favourable than average, and positive scores (maximum +100) that it is more favourable than average.

The vdp Issuance Climate survey provides information twice a year on the sentiment among the members of the Association of German Pfandbrief Banks (vdp) with regard to the placement of Pfandbriefe and unsecured bank bonds. To assess this sentiment, experts from the vdp member banks are asked about the factors influencing Pfandbrief and unsecured bank bond sales. Each survey covers the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation.

The responses are grouped together by subject area, providing an overview of the supply and demand situation on the markets for Pfandbriefe and unsecured bank bonds. Three scores are then calculated based on certain assumptions about the relative importance of each subject area: one score each for Pfandbriefe and unsecured bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores indicate that the issuance environment is less favourable than average, and positive scores that it is more favourable than average.

The Pfandbrief banks belonging to the vdp hold a market share of almost 96% of outstanding Pfandbriefe.