Reduced commercial real estate lending is positive for German Pfandbriefe because it will, over time, improve the composition of mortgage cover pools, despite an initial temporary increase in credit risk, said a Moody’s analyst today (Monday).

The comments were triggered by Commerzbank last Tuesday (26 June) announcing that it is withdrawing from the commercial real estate (CRE) business, stopping all new lending and winding down its existing portfolio.

Martin Rast, vice president, senior analyst, Moody’s, said Commerzbank’s decision contributes to a trend of declining availability of CRE lending in Europe.

“Much like Commerzbank’s decision to wind down Eurohypo, which before the crisis was Europe’s largest CRE lender, many traditional CRE banks also have decreased or stopped their CRE lending,” he said. “Reasons include higher regulatory capital requirements and actual or expected losses on their legacy exposures.

“Even though a few alternative lending sources like insurance companies have started to emerge, the overall availability of CRE debt remains limited to high quality borrowers and collateral.”

He said that the trend is credit negative for European commercial mortgage-backed securities (CMBS), but positive for Pfandbriefe because CRE loans are the riskiest assets in mortgage cover pools and the reduction of CRE lending will mean that their share of German Pfandbrief cover pools will decline.

Although a lack of available CRE debt funding will temporarily increase credit risk in the cover pools, over the long term their quality will improve, said Rast.