Commercial property finance abroad

Commercial Mortgage Lending by Pfandbrief Banks Outside of Germany

Roughly two thirds of all business outside Germany was transacted in just three countries. At € 5.4 billion, or 27 %, the largest proportion of this related to the United Kingdom, with the USA (€ 4.3 billion, or 21.8 %) and France (€ 3.6 billion, or 18.2 %) also being important markets for vdp member banks.

Outstanding commercial property financing outside Germany stood at € 114.7 billion at the end of 2013, representing 43.9 % of all outstanding commercial property loans. At € 22.6 billion, or 19.7 %, the United Kingdom was the most significant international market for Pfandbrief Banks, followed by France with € 22.1 billion (19.3 %) and the USA with € 18.0 billion (15.7 %).

Cross-border property finance as cover for Pfandbriefe

As in the years before, the vdp in 2008 represented the interests of its member banks in cross-border mortgage lending. The focus remained concentrated on issues concerning the use of loans and collateral in respect of properties located in other countries that serves as cover for Mortgage Pfandbriefe. For this reason, the vdp's International Real Estate Finance Committee and the three working groups Core Europe, Central Europe and UK & G7 – as well as the vdp's Head Office – engaged constantly in examining the legal situation in these countries to ascertain what criteria were needed with regard to the eligibility of assets to cover Pfandbriefe and what standards ought to be adhered to.

The vdp has developed for its member institutions a checklist specifying the documents to be presented to a cover pool monitor when a loan is to be included in cover. This checklist was revised twice during the course of 2008, and extended to include a total of currently 26 countries. What is more, the checklist is now available in English as well as in German to satisfy the needs of employees working in foreign branches and representative offices of the vdp member banks.

Not more than 10% of eligible assets may be located in non-EU countries in which loans and collateral in respect of properties may serve as cover, unless the Pfandbrief creditors' preferential right in case of insolvency can be confirmed beyond doubt (§ 13 par. 1 sent. 2 Pfandbrief Act). In previous years, studies commissioned by the vdp were conducted by Prof. Dr. Rolf Stürner of the University of Freiburg with Dr. Christoph Kern to examine this question for the USA, and with Prof. Astrid Stadler for Switzerland. These studies succeeded in identifying how the preferential right in case of insolvency can be achieved by legal means (vdp series of papers, vol. 28 and vol. 31). The findings of these studies were implemented in 2008 through suitable contracts. They were compiled on behalf of the banks that use them, with the assistance of vdp in Berlin and in consultation with Prof. Stürner. Through these contracts a security interest is created in the USA in favor of Pfandbrief creditors. In the case of Switzerland, the claims are transferred to a special trustee under Swiss law, who acts on behalf of the Pfandbrief creditors, and the certificates of indebtedness are pledged to him. If insolvency-law measures have to be taken, the rights thus substantiated can then be made available to satisfy the bank’s creditors in the country in question. This means that banks which use such contracts have ensured the preferential right in case of insolvency in respect of mortgage cover assets in the USA and/or Switzerland. The cover assets which are secured by real estate liens in respect of properties in these countries are not included in the calculation of the 10% limit pursuant to § 13 par. 1 sent. 2 Pfandbrief Act.

Under § 15 Pfandbrief Act, building insurance must be taken out for the buildings on properties, collateral in respect of which is included in cover for Mortgage Pfandbriefe, against substantial risks typical for property type and location. To deal with the many individual questions which arise in different countries in connection with this requirement, the vdp compiled an overview which was expanded in 2008 to form a database in its own right in the vdp’s Extranet. This database currently contains information on 16 countries, and is updated and enlarged as and when necessary.

In many countries, real estate liens in respect of titles equivalent to land, such as the building lease or ownership of residential apartments in Germany, are used to secure and cover Mortgage Pfandbriefe. Under § 13 par. 1 sent. 2 Pfandbrief Act, these rights must be comparable to titles equivalent to land property (“grundstücksgleiche Rechte”) under German law. To this end, the vdp conducts research into such titles as well as into points to be observed when dealing with them. In 2008, the vdp studied the Dutch “erfpacht” and the Spanish “derecho de superficie”. The Finnish mutual real estate companies were also examined. Yet another point of focus in 2008 concerned the long lease (leasehold) under English law, which is of special economic importance, yet takes a wide variety of forms. An individual checklist is being compiled to assess the eligibility of this instrument as cover for Pfandbriefe.

Pfandbrief banks are being included more and more often in the syndication of real estate loans. It is crucial that the parts of these syndicated loans that are taken over by Pfandbrief banks may be included in cover for Mortgage Pfandbriefe. The vdp is constantly examining questions related to this topic in the individual countries, and in 2008 confirmed, among other things, that Pfandbrief banks incur no risk when the real estate lien in England is held in trust by an agent for the participating banks.

In the USA in particular, the same legal issues are often addressed as with Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS). Moreover, in 2008, after the MBS market collapsed, the question was frequently raised whether loans for which MBS were envisaged could now be syndicated to Pfandbrief banks. Many questions arising in this context are addressed by Florian Linkert’s dissertation, published as vol. 36 in the vdp series of papers, "Insolvenzrechtliche Risiken bei Asset-Backed Securities” (Insolvency law-related risks in the case of Asset-Backed Securities). This paper draws a comparison between the legal systems in the USA and Germany with regard to insolvency remoteness – the question central to the eligibility of MBS as cover for Pfandbriefe. The author presents evidence to the effect that, if the originator becomes insolvent, the buyer of the assets does not in any way enjoy less legal protection in Germany than in the USA. Indeed, the German legal framework has probably gone one step further with the introduction of the funding register.

At the request of the Federal Financial Supervisory Authority (BaFin), the vdp held a workshop in Great Britain on the legal aspects of property finance in England and Wales, with experts from London and from vdp member banks providing a general overview.

The vdp’s work concentrated, moreover, on examining the eligibility as cover of commercial property loans in Japan. There, the properties are usually made available through a legally regulated trusteeship in favor of the financing bank. It was possible, in the course of many discussions with experts and the Japanese supervisory body, to identify two ways this legal solution could be used that also took into account the Japanese banking supervisors’ initial misgivings regarding participation by foreign credit institutions. First, it is now deemed permissible for the branch of a Pfandbrief bank to be awarded a license as money lender and to engage in business activities in Japan. Second, according to the stringent Japanese trust laws, a Japanese bank can act as trustee for the Pfandbrief bank in respect of its real estate collateral.

Information and studies on property finance legislation

Over and above questions regarding their eligibility as cover for Pfandbriefe, the vdp also concerns itself with other property finance-related issues, both in the countries in which properties may serve as cover under the Pfandbrief Act and in certain other countries.

For the USA, reports have been completed on property finance legislation in a total of seven states, and four others are to follow. With these reports, the vdp provides its members with a source of information the like of which is not as a rule made generally available in the United States.

In keeping with legal developments in 2008, particular focus was placed on France, where the effects of a number of reforms on property finance were examined. A new mortgage type was introduced in France with a greatly reduced accessoriness, the “hypothèque rechargeable”, and trusteeship (“fiducie”) was completely overhauled .

The vdp offers its members this and other material, indexed by countries, on the vdp’s Extranet. This information service was expanded further in 2008, and now comprises more than 220 reports and studies, extracts from minutes from vdp expert panels concerning the individual countries, and much more besides. In addition, the vdp member banks can use a link from the vdp Extranet to access the Extranet both of the Mortgage Credit Foundation in Warsaw (Fundacja na rzecz kreditu hipotecznego) and of the Association of Hungarian Mortgage Banks (Magyar jelzálogbank egyesület), where further papers are available, many of them also in German. Both organizations cooperate closely with the vdp.

Moreover, the Center of Legal Competence in Vienna, in cooperation with the vdp, has published two further accounts of real estate law in other countries. These, too, have been included in the vdp’s series of papers:

Vol. 34, “Real Property Rights in the Slovak Republic” by Michaela Stessl, sets forth the legal framework for property finance in Slovakia. This work was published jointly with the Association of Hungarian Mortgage Banks, in English.

Vol. 35, “Grundeigentum und Sicherheiten in Bulgarien” (Landed property and collateral in Bulgaria) by Dimitar Stoimenov and Boris Ivanov, provides important information on this particular EU member state. Complementing this work, plans already exist to publish an account of the assertion of rights under collateral in the case of foreclosure and insolvency.

Two vdp country seminars on property finance allowed member institutions to gain valuable insight into the legal basics of financing real estate in Russia and Romania. Members of the vdp were also able to take part in seminars held by the Mortgage Credit Foundation in Warsaw .

Legal monitoring for the Solvency Regulation (Basel II)

January 1, 2008 marked the entry into force of the amended German Banking Act and the Solvency Regulation (SolvV), which transposed the EU Banking Directive into German law. The Solvency Regulation stipulates explicitly that the legal effectiveness and enforceability of loan collateral must be assured on an ongoing basis by means of ad hoc reviews (section 172 (3) SolvV), and that real estate liens in particular must be legally enforceable within an appropriate period of time; this must be documented. As this necessitates constant monitoring of the legal framework in each of the target countries, two internationally operating law firms, with the involvement of the vdp, the Federal Association of German Banks (BdB) and the Association of German Public-Sector Banks (VÖB), submitted offers to carry out this task and have set up relevant systems. Expert panels from the associations are now examining the relevance of information received from the commissioned law firms. In cases that are deemed to be relevant, the institutions are then asked to identify contracts concerned and look into whether action is called for.

Onward development of property finance laws

The vdp supports partner associations in other countries in further developing and improving legal provisions pertaining to property finance. The extensive reform currently under review by the Hungarian parliament of the country’s Civil Code contains important proposals for improving the Hungarian independent mortgage. The vdp cooperated with the Association of Hungarian Mortgage Banks in drawing up these proposals. In 2008, the vdp worked with the Mortgage Credit Foundation in Warsaw on a number of different issues, including questions concerning the reform of mortgage legislation currently being discussed there. Moreover, the vdp moderated two seminar events for the Ukrainian National Mortgage Association on property finance issues.

Endeavors currently underway to reform the Russian law on covered bonds (ipotečniye obligacii) are being supported by the vdp. Representatives of the vdp were included in a roundtable discussion of the Duma, the Russian parliament. Experience gathered in other countries shows that the introduction of covered bond systems also has the indirect effect of improving the legal framework for property finance.

Systematic comparison of law and risk measurement

The research project “Runder Tisch Flexibilität, Sicherheit und Effizienz der Grundpfandrechte in Europa”, which was launched in 2005, is the first of its kind to collect information on legislation governing real estate liens in different European countries. The data are gathered on the basis of uniform questions and presented in overview form. To this end, since 2005, leading experts from the individual countries have met at the vdp to take part in workshops. The most recent workshop was in 2008.

The project made substantial progress in 2008:

  • The number of member countries rose from 13 to 22.
  • In addition to questions concerning the flexible use of real estate liens, consideration is now also given to safety and efficiency in the land register, in case of realization and in insolvency. The answers to the individual questions are each presented in a cross-section of the countries in more than 90 geographical overviews.

The vdp has published the results in vol. 37 of its series of papers (“Schriftenreihe”), under the title “Flexibilität, Sicherheit und Effizienz der Grundpfandrechte in Europa, Band III”, with explanatory remarks by Otmar Stöcker and Professor Rolf Stürner. An English translation is in progress.

These results can be put to a number of different uses:

  • They provide the expert world, for the first time, with a uniform Europe-wide comparison of real estate lien laws.
  • When individual countries prepare for legislative reforms, they can refer to the legislative position in other European countries. This makes it easier to improve legal systems, thereby ultimately making the work of Pfandbrief banks easier, too. Comparison sheds light on developments in Europe, and can boost the trend that already exists to a pan-European convergence of the individual legal systems.
  • When calculating capital adequacy, banks must measure the extent to which a real estate lien reduces their loan loss risk. The loss given default (LGD) sustained by a bank can be reduced considerably if the lien is realized. The extent of the reduction of this LGD is often calculated on the basis of historical statistical data, although the quality of such data is frequently inadequate. Thus, information on the applicable legal provisions can be useful as a basis for determining LGD ratios by way of international comparison, especially in connection with the realization of collateral and insolvency.

  • The vdp is currently devising, in cooperation with Hyp Rating GmbH, a system for assessing and categorizing real estate liens which it is hoped will produce comparative results. This system is to be flexible enough to allow individual credit institutions, sometime in the future, to apply the particular characteristics of the respective business and contractual practice.

    The “Runder Tisch” research group will be staging further workshops to deal with this assessment system in greater detail.

Further information:

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