The Real Estate Forum Tuesday, 4 th May 2004 Bucharest.

The Real Estate Forum

Tuesday, 4th May 2004Bucharest

The Financial Integration of European Real Estate

Markets

Simon WalleyHead of Economic Affairs

European Mortgage Federation

European Mortgage Federation

European association founded in 1967

Represents the interests of mortgage lenders

Romanian members are National Housing Agency

Brings together mortgage lenders from all EU countries and Switzerland

Accession countries membership: Czech Rep., Hungary, Malta, Poland & Latvia

Represents over 75% of EU mortgage market

European Integration

Background to European Mortgage Markets

Measuring Financial Integration

What are the benefits for lenders/borrowers?

Obstacles to Integration

Achieving the single market

Market trends

Outstanding volume of mortgage loans in 2002 exceeded EUR 4.2 trillion

Twice the amount of 10 years ago

Growing at approx. 8% per year over the last 10 years

Around 42% of European GDP

Mortgages Outstanding - 2002

0 200 400 600 800 1,000 1,200

Luxembourg

Greece

Finland

I reland

Portugal

Belgium

Norway

Sweden

Denmark

I taly

Spain

France

Netherlands

UK

Germany

Source: European Mortgage Federation

€ Billion

Mortgage Debt/GDP Ratio -2002

0% 20% 40% 60% 80% 100%

I taly

Greece

Luxembourg

France

Austria

Belgium

Finland

I reland

Spain

Sweden

Portugal

Norway

Germany

UK

Denmark

Netherlands


EU 42.6% US 79.6%

Mortgage Debt per Capita - 2002

0 5 10 15 20 25 30

Greece

I taly

France

Portugal

Spain

Belgium

Finland

Luxembourg

I reland

Germany

Sweden

UK

Norway

Netherlands

Denmark

South – €4,200

North – €15,300

Big difference in debt levels between Northern and Southern Europe

Home ownerships and cultural factors behind difference

Gap diminishing with rapid growth of Southern European mortgage markets with slower growth in the North


€ Thousands per Capita

Home Ownership Rates -2002

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Germany

Austria

Denmark

Netherlands

France

Luxembourg

Sweden

Finland

I taly

UK

Belgium

Portugal

Norway

Greece

I reland

Spain


Growth in Mortgages – 1992/02

0% 5% 10% 15% 20% 25%

Sweden

Finland

France

Germany

Denmark

Belgium

UK

I taly

Netherlands

Spain

I reland

Portugal

Greece

Source: European Mortgage Federation% Annual Rate of Growth in Mortgage Balances Outstanding

EU Average – 8.2%






Achieving single market

Measuring Integration

Cross-border lending

Law of One Price – In an efficient market, assets generating same return should be priced the same regardless of location

Level of Industry consolidation

Cross-border lending?

Virtually non existent for residential mortgage markets

Mainly limited to holiday homes

Some regional initiatives such as UCB in Mediterranean countries or Nordea in Scandinavia

Pan-European Internet Banks have largely failed

Cross Border Commercial Real Estate Investment 2003

Source: DTZ Debenham Tie Leung

Law of One Price - Mortgage Rates

Nominal Interest rates vary widely by market

However, these comparisons do not compare ‘like with like’

– Differences in interest rate variability

• Variable v fixed rate• Length of fixed rate term

– Differences in national base rates– Prepayment options included in

the product– Credit risk differences

A more refined measure is needed to compare price levels

Source: Mercer Oliver Wyman

Unadjusted mortgage rates

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

DK F UK D IT NL PT ESP

Range 166 bp

Adjusted price is a measure of price levels not pass-through

Component methodology– Nominal rate, fees and

yield curve adjustment at product level

– Credit risk and prepayment adjustments at country level

Caveats Discounts from the published price are not

reflected in the analysis Point in time analysis and so does not reflect

trends Sample weighted towards larger lenders Data based on questionnaire responses from

lenders supplemented by publicly available price data


Adjusted mortgage rates methodology

5

330

9921

439

16

0

100

200

300

400

500


60% of differences in nominal rate are due to underlying product differences

Countries with highest nominal rate are not those with the highest adjusted price

Average adjusted prices are in a range of 64bp

This is less than the variation in prices within many markets


Adjusted mortgage rates

0.0%

0.5%

1.0%

1.5%

IT UK ESP NL PT F DK D

Range 64 bp


Market Consolidation - National


L380-01-0033

Top 5 Market Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

DK PT NL I F UK E D

U.S. 37%

E.U. 24%

National Market share of top 5 lenders

Market Consolidation - International

UK, Germany, France, Italy, Spain largely domestic banks with no foreign ownership

Benelux and Scandinavia more international

Central and Eastern European markets dominated by foreign banks – 75% of banks are foreign owned (US and EU)

No true European banks at retail level

Benefits of Integration Reductions in cost levels allowing reductions in

prices or increase in profitability– Servicing costs– Distribution and origination costs

– Funding and risk management costs

Market completeness gaps– Gaps relate to high risk mortgages, fixed rate products, indexed and

capped adjustable rate mortgages and flexible repayment products– Product gaps often driven by regulation

e.g. consumer protection

There is still potential for individual markets to become more efficient and complete– Greater integration is one possible driver of benefits– However some benefits can be delivered via domestic change alone

No business case for cross-border lending?

Average return on a mortgage loan is low

High costs associated with setting up a business in another country (distribution channels, access to borrower information, etc)

Market inefficiencies related to loan approval, mortgage registration and repossession

lack of market scale, lender size & loan size

Cross-subsidisation

Financial Services Action Plan

A series of measures agreed at Lisbon summit in 2000 and intended, by 2005, to fill gaps and remove barriers to a Single Market in Financial Services

“act as a catalyst for economic growth across all sectors of the economy, boost productivity and provide lower cost and better quality financial products for consumers, and enterprises, in particular SMEs”

FSAP key objectives

A single wholesale market

An open and secure retail market

State-of-the-art prudential rules and supervision

FSAP Measures cover: Securities, Accountancy, Company Law, Insurance, Savings, Payments, Money Laundering, e-Money, Insolvency, Supervision

FSAP Progress – end 2003

4 2

36

State of play on individual original FSAP measures

Proposals to be made:Proposals to be made: CADCAD 1414thth Company Law Directive Company Law Directive

Under Negotiation:Under Negotiation: Revised ISDRevised ISD TransparencyTransparency Take-over bidsTake-over bids 1010thth Company Law Directive Company Law Directive

CompletedCompleted

Basel II and CAD III Rules

Will have an impact on all credit institution in Europe

Will set common capital adequacy standards…

… but also encourage standardisation of Risk Management, Supervision, Accounting, Valuation, Disclosure, etc

Still a number of questions, including 70 items of national discretion

EMF Recommendations (1-6)

1. Improving cross-border transparency2. Extending the scope of the Code of

Conduct 3. Introduce common price calculations to

allow comparisons

Building Trust

4. Improve cross-border access to national credit registers

5. Improve transparency of Europe’s land registers

6. Improve European mortgage collateral systems

Improve Efficiency – Lower Costs

EMF Recommendations (7-9)

7. Allow borrowers greater flexibility to move lenders

Increase level of competition

8. Develop a European secondary mortgage market to fund Europe’s mortgage loans

Reduce Cost of Funding

9. Create a level playing field by eliminating state subsidies and guarantees which distort mortgage markets

Create a level playing field

6 Key Fundamentals for an efficient, integrated Housing Finance System

Sound macro-economic policies

Low transaction costs

Efficient “primary market”

Promote transparent markets

Consumer Protection

Standardised funding instruments to tap capital markets

Conclusions

The Real Estate Forum Tuesday, 4 th May 2004 Bucharest.

Documents

Transcript of The Real Estate Forum Tuesday, 4 th May 2004 Bucharest.