Concerns Over US Commercial Real Estate Impact German Bank Bonds

ByDayne Lee

Feb 12, 2024

This week, the turbulence affecting the commercial real estate (CRE) sector, which has already seen banks in New York and Japan face difficulties, has extended to Germany, Europe’s largest economy. The bonds of German banks with a focus on real estate investments have experienced significant declines, notably influenced by concerns regarding their involvement in the US CRE market.

German Banks Face CRE Market Fallout

Analysts from Morgan Stanley have advised clients to divest from senior bonds issued by Deutsche Pfandbriefbank AG (PBB) due to its exposure to the US CRE market, according to sources who wished to remain anonymous. This advice precipitated a substantial drop in PBB’s junior bonds, marking a record decline. However, the bank managed to recoup some of its losses after announcing an increase in risk provisions and reporting a preliminary pretax profit for the full year that aligned with expectations.

Treasury Secretary Janet Yellen has acknowledged the challenges within the CRE sector, suggesting that although it presents a concern, the situation is manageable. Yet, analysts from Green Street have highlighted the delay in appraisers marking down US business property values following interest rate hikes. They estimate that a further reduction in asset values of up to 15% may be necessary across the sector this year to align with the current market conditions.

Banking Sector on Edge

The banking industry has been on high alert following New York Community Bancorp’s unexpected loss report last week, which led to a cut in its dividend. While smaller and regional banks in the US are the primary financiers of CRE, European banks like PBB also have significant exposure.

Other German banks, such as Landesbank Baden-Wuerttemberg and Aareal Bank AG, have seen their bonds slump, with investors growing increasingly cautious. Concerns are that PBB may need to further increase its loan loss provisions, potentially impacting its profitability despite robust capital buffers.

Market Reactions and Investor Sentiment

The recent downturn in the CRE sector has led investors to try and offload PBB bonds, often at considerable discounts. This follows a pattern from last November when PBB’s bonds suffered after the bank missed earnings expectations and revised its full-year forecast downwards.

Deutsche Pfandbriefbank and Aareal Bank, known for their substantial CRE exposure, face heightened scrutiny as the real estate and construction sectors grapple with rising interest rates. Analysts advise caution regarding banks with significant lending in these areas.

Short Interest and Bond Issuances

Short interest in PBB has surged to over 17%, the highest since records began in 2015. Short sellers are betting on further declines in the bank’s stock price. Meanwhile, Landesbank Baden-Wuerttemberg seeks to mitigate risks by raising funds through the issuance of a 10-year covered bond, a move indicative of the banking sector’s search for stability amidst market volatility.

Table: Impact of CRE Concerns on German Banks

BankBond ImpactCRE Exposure ConcernsMarket Response
Deutsche Pfandbriefbank AGRecord slump in junior bonds; senior bonds advised for saleHigh exposure to US CRE market; increased risk provisionsPreliminary profit meets estimates; recovery after initial drop
Landesbank Baden-Wuerttemberg€750 million AT1 bond slumpsSeeking €500 million with new bond issuance
Aareal Bank AG€300 million note slumps

As the commercial real estate sector continues to navigate through uncertain waters, impacted by interest rate hikes and valuation adjustments, German banks with exposure to the US market are closely monitoring developments. The situation underscores the interconnectedness of global financial markets and the broader implications of economic policies and sector-specific challenges.


Featured image credit: Iryna Melnyk via iStock

Dayne Lee

I have a background that includes experience as a day trader in the financial sector before transitioning into my current role as an editor. My focus is on ensuring our stories are accurate and engaging for our readers, and I enjoy collaborating with our writers to provide the best news coverage possible. This journey from finance to writing has been both challenging and rewarding.