The Pfandbrief 2011 | 2012

The German Property Market – Guaranteeing the Sustained Value of Mortgage Pfandbriefe
In the eyes of risk-averse property investors or investors in Mortgage Pfandbriefe, Germany
benefits from a number of positive factors:
Aggregated for Germany as a whole, losses in the value of commercial properties have
consistently stayed well below 40%. Indeed, in the current crisis, valuation corrections
amounted to less than 20%, which is by far the lowest figure compared with peer markets.
Based on the conservative rule which applies to the determination of the MLV (market
value = upper limit of the MLV), cover for Pfandbriefe in the form of mortgages was not at
risk at any time (for more about the relationship between market value and MLV, see the
box below). In terms of the sustainability of value, then, the market must be regarded as
very safe.
Unlike the other four established property markets (above), in Germany all three downturns
are very similar with regard to the need for write-downs and the course of events
– irrespective of what caused the individual downturns (i.e. whether they were driven by
events on the property market, or not).
From the investor’s viewpoint the German market has, moreover, shown itself to possess a
high level of predictability. Above all, this is attributable to the low volatility of the German
rental markets and the sustained action by market players. This is confirmed, yet again, by
latest developments in individual commercial property segments.
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Mortgage Lending Value Creates Security
Whereas the market value on a given date usually serves as the basis for an investment decision,
the mortgage lending value (MLV) of a property – which takes its bearings from the
entire life of the loan – is the basis for the refinancing of loans by issuing Mortgage Pfandbriefe.
Thus, the MLV is a stable value in the long term: market fluctuations, particularly downswings,
should already be factored into the MLV. The general rule is that the MLV must not
exceed the market value.
The market value and the MLV are calculated using the same method, but differ greatly in
terms of the underlying assumptions. German law prescribes certain restrictions when determining
the MLV which are intended to take into account the safety aspect of the Pfandbrief as
an investment eligible for trusts. In the case of income properties, for instance, only a rental
income that any property owner would be able to generate on a lasting basis may be taken
into consideration. Furthermore, regulatory limits apply to certain valuation parameters, e.g.
minimum amounts for operating expenses, bands for the useful life of a building and lower
limits for capitalization rates; moreover, haircuts have to be complied with when using the
asset value method or the comparable method of valuation.
Through the concept of the MLV, which is based on permanent features of the property, it
is possible in principle to cushion even fluctuations such as those seen in the last crisis without
affecting the calculation of cover. Even in exceptional cases in highly volatile markets, a
50% loss in the market value would not affect the senior tranches of mortgages that serve as
collateral for Pfandbriefe. If, however, a severe slump in prices were to raise the possibility of
losses, the MLV must be adjusted accordingly for cover calculation purposes.
Mortgage lending values are calculated by valuers who are required to furnish proof that
they are specially qualified to carry out the determination of the MLV. In this way, it is assured
that the high demands placed on the valuation, and therefore on the quality of the Pfandbrief,
are met at all times when the MLV is determined.