ANNUAL REPORT 2006 - DG Hyp

The outlook for competitive development
of residential real estate finance in Germany
Thanks to its real estate know-how and its role as a
firmly established intermediary between the credit and
capital markets, DG HYP has the ability to recognise trends
driven by demographic and social developments in Germany
(together with demands in its international competitive
environment), and to swiftly respond with new products
and services. This includes higher demands regarding
the flexibility of real estate loans, as well as the need for
increased security in financing models. The increasing
importance of residential real estate as a form of retirement
provision, or the changing needs regarding a property
during different stages in life, also need to be considered
in this context.
The following key trends are discernible for the future
development of the product range:
More flexibility
Customers in international markets require a much higher
degree of flexibility in residential real estate finance
than in Germany. Real estate loans often have no fixed
interest rates, and flexible real estate lending is much
more prominent compared to the German market: this
includes loans with early termination rights (without prepayment
penalty), changes in the redemption schedule
(including redemption breaks), or revolving loans which
are increased or reduced according to the customer's
needs.
Given increasing market transparency and the growing
number of international competitors on the German
market, being able to offer its own solutions for flexible
product requirements will become increasingly important
for the German cooperative banking sector.
More refined hedging options
Being able to hedge against risks is not only becoming
ever more important for banks, but just as much for their
customers. Crucial risk factors affecting residential real
estate finance include job loss or divorce.
Against this background, there may be scope in individual
cases to minimise risks by adding product elements
such as unemployment insurance, residual principal
cover, building insurance or similar products, which may
be integrated into the financing.
10 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2006
Recognising demographic requirements
Demographic developments in Germany hold a major
challenge for the retail business of banks and insurance
companies, as their traditional target groups – those
starting their careers – are declining significantly. New
opportunities arise through the provisioning gap in state
pension schemes, which means that young and old people
alike need to take a more active role in securing their
own retirement. Real estate plays a major role in this
context, alongside life assurance and savings products.
Given the sheer dominance in numbers which ‘55+’
customers are going to achieve, banks and insurance
companies will be forced to scrutinise the circumstances
and needs of this group, and to draw the right
conclusions. As their working life is being extended
(currently until the age of 67) and their financial situation
is – generally – rather sound, this group holds significant
potential through the changing use of properties in line
with age requirements. This includes acquiring smaller
residential units in central locations, investing in modernisation,
switching or extending existing financings, or
entering into innovative, communal forms of living.
Financing products can be tailored to suit the needs of
this group through new offers, such as using a property
to generate a pension, or special loans for senior citizens.
Active customer service – coverage from the first to
the last property
Recognising the increasing importance of early planning
for private retirement provisions, in conjunction with the
still low proportion of owned residential properties in
Germany, the active coverage of life planning concepts
across different real estate ‘stages’ may indeed be an
attractive proposition. This coverage may include firsttime
buyers making a limited investment early in their life
(when they have less equity) to financing a larger family
property (having established one’s career), right through
to financing a suitable residence for their later years (or
generating a pension from it).
This means that real estate finance will evolve into a key
component of customers' systematic retirement planning:
using different product and pricing profiles during
each financing phase. These requirements will place considerable
demand on the bank’s product development
and credit risk management skills.