German Pfandbrief issuers are cautious about the outlook for the second half of the year, according to the vdp’s latest Issuance Climate survey, despite first half market conditions having proven even more buoyant than expected, although overall supply is on track to reach almost €50bn in 2024.

Improvements in market conditions between the second half of 2023 and this year were highlighted in the current score for oversubscription levels, which swung from minus 69 in December’s survey to plus 43 this month. The 38 respondents assign a score of minus 100 to plus 100, reflecting their views on the unfavourableness or favourableness of market conditions for issuance.

Vdp members had expected market conditions to improve into 2024, in December producing an expected investor demand score for the first half of plus 37 – up from minus 44 for the previous six months – but the reality even exceeded this bullish forecast, with investor demand for the first half of 2024 scored at plus 45 in the latest survey and the same for the prevailing market.

“The increase in interest rates and the attractive spreads versus Bunds and swaps led to very strong demand for Pfandbriefe in the first five months of the new year,” said Sascha Kullig, management board member at the vdp (pictured).

“It is pleasing to note that longer dated Pfandbriefe, which are important for long term property financing, were again in good demand.”

However, anticipated investor demand for the next six months was scored at only minus 3. Issuers returned their surveys across the first half of this month, when market conditions deteriorated, sparked mainly by concerns over French political developments contributing to the slowest month for benchmark covered bond issuance of the year.

All charts: Source: vdp; Copyright: Börsen-Zeitung, Grafik

So while the overall score for Pfandbriefe of minus 11 was higher than those of the previous two surveys, it remained negative in spite of the market’s recent buoyancy – scores for the next six months are given the strongest weighting in the calculation of the overall score.

“It is not surprising that, following the strong first five months of 2024, somewhat more investor reticence is again expected,” said Kullig. “And, of course, given the French situation, some uncertainty returned to the market.

“On the other hand, it appears that Germany is becoming something of a safe haven again, and some analysts are saying that German Pfandbriefe might outperform French covered bonds, for instance. So my personal view is that investor demand might turn out better than our experts expect.”

The dynamics captured by issuers in their scores for past, present and future Pfandbrief issuance conditions are largely mirrored in their responses vis-à-vis unsecured debt, which are nonetheless expected to experience a greater deterioration in investor demand, from plus 48 currently to minus 32.

The general trend in interest rates is perceived as the biggest negative for the coming six months, being scored at minus 53, versus minus 24 in December’s survey. ECB support – or lack thereof – was at that time scored at minus 50 for the first half of 2024, but the relevance of CBPP3 and related interventions has receded, with it coming in at only minus 14 in the latest survey.

The receptive conditions of the first half occurred in spite of concerns about the commercial real estate sector and volatility in names such as Aareal and Deutsche Pfandbriefbank (pbb). However, spreads have since settled down and CRE has receded from the headlines somewhat. The latest score for the way in which lending business to be refinanced could affect the issuance climate was minus 32, still significantly negative, but up from minus 53 in December.

“If you look at the first quarter of this year, we have already seen a kind of revival in residential lending activity,” said Kullig. “It’s different on the CRE side, where lending by our member institutions was again really low. Those trends are reflected in price developments, with the bottom having perhaps been reached in residential prices, but not on the commercial side.

“However, it does seem that concerns about CRE both in the US and Germany, and the specific situations of some banks has become more muted, with other developments overshadowing them.”

Supported by the attractive conditions of the first half, vdp members’ issuance is largely on track to come in close to the €49.5bn they forecast going into 2024, with almost €30.1bn having been in the first five months of the year, nearly 10% up on the corresponding period of 2023.

Benchmark Pfandbrief issuance now stands at around €20bn, including taps, versus €36.3bn that had been forecast for the full year. However, while the run-rate and path of benchmark issuance could see it come in below forecast, private placement issuance has recovered to support overall volumes, and vdp members in a parallel semi-annual survey expect a further €18bn-€19bn of issuance this year.