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GdW Summary on CEBS Consultation Paper and the Abolition of Optional Choice

Core Content

The GdW Bundesverband deutscher Wohnungs- und Immobilienunternehmen (German Head Federation of Housing and Real Estate Enterprises) has expressed its position on the CEBS Consultation Paper of 22.5.08, which proposes the abolition of optional choice in the context of Basel II implementation. The GdW represents approximately 3,200 housing enterprises and housing co-operatives, managing a total of about 7 million dwellings. Its primary activities include the management and rent-out of dwellings, as well as development and financing schemes related to real estate.

Main Concerns of the Housing Sector

The housing and real estate sector is highly dependent on borrowed capital, with an average equity capital share of 15–25% in Germany. This structure necessitates long-term financing, typically through loans securitised by residential real estate (RRE). Such financing has historically provided security for both investors and tenants, as it allows for stable planning and predictable rent increases, even in the face of rising interest rates.

EU Directive 2006/48/EG and Medium-Sized Enterprises

The EU Directive 2006/48/EG includes facilitations for small and medium-sized enterprises (SMEs), particularly in Annex VII, Part 2, Point 15, which allows member states to exclude enterprises with total assets and annual turnover below 500 million Euros from overhead charges for the term of repayment under the Internal Ratings-Based (IRB) approach.

This provision is especially relevant to Germany, where long-term real estate financing is a well-established practice. The GdW and its European partners had previously advocated for a tailored regulation that accounts for the specific needs of the housing and real estate sector, given its unique financial characteristics.

Current Status and Advocacy

As of 2007, nearly 100 affiliated housing enterprises in Germany still exceed the 500 million Euro threshold in total assets, despite being classified as medium-sized enterprises. These enterprises manage around 2 million dwellings, highlighting the significant impact of the proposed changes on the sector.

The GdW urges the continuation of the optional choice for housing and real estate enterprises under the medium-sized enterprise component of the EU Directive 2006/48/EG. The abolition of this optional choice would increase overhead charges for long-term repayment, which could have severe negative consequences for the sector.

Key Arguments for Maintaining the Optional Choice

• Low Risk Profile: The housing and real estate sector has demonstrated a low risk in long-term financing, making it well-suited for the IRB approach.
• Financial Stability: Long-term financing is essential for maintaining financial stability and ensuring sustainable housing supply.
• Sector-Specific Needs: The criterion of total assets is atypical for the housing sector, and the optional choice allows for more accurate risk assessment.
• Continuity of Practice: The optional choice has been adopted in several EU countries, including Germany, Austria, Malta, Portugal, and Liechtenstein, reflecting a shared understanding of the sector’s unique financial structure.

Conclusion

The GdW strongly supports the maintenance of the optional choice for housing and real estate enterprises within the EU Directive 2006/48/EG. This choice is critical for the sector's financial sustainability and aligns with the long-term financing culture that has been successfully implemented in Germany and other EU countries. The potential negative effects of abolishing this choice, particularly the increase in overhead charges, could harm the housing market and impede the development of affordable housing.