Ladies and gentlemen, hello, and welcome to pbb's Capital Markets Day. On behalf of pbb, I would like to thank you for your participation and for your interest. My name is Michael Heuber. I'm heading the Investor Relations of pbb, and I will lead you through this event. Today, we will present you an update of pbb's strategy. Allow me to briefly outline today's agenda. We will start with an introduction to our Strategy 2027 from Kay Wolf. He will outline the key elements of pbb's strategy going forward. This will be followed by presentations on different business lines. First, Thomas Köntgen, co-CEO and responsible board member for Commercial Real Estate, will outline how we implement our Strategy 2027 in our core business. Walter Hampel, Head of Real Estate Finance Continental Europe, will afterwards focus on new trends and explain how we want to leverage them.
This will cover the on-balance-sheet business. Second, Pamela Höhr, responsible board member for pbb Invest, will speak about pbb Invest, followed by Andreas Würmeling, head of Loan Markets. They will cover the off-balance-sheet fee business lever. Afterwards, Marcus Schulte will walk you through the financials and KPIs of our Strategy 2027. Kay will sum up, and at circa 3:00 P.M., we will have a thirty-minute break. This will then give you the opportunity to place questions via the Slido tool. You can access the tool via the QR code provided with registration and already being displayed on your screen. But no worries, it will also be displayed later on. After the break, at 3:30 P.M., we will start the Q&A session. All presenting board members will be available to answer your questions. The presentation is now also available on our webpage.
As most of you know, Kay Wolf joined in February this year as new CEO, coming from Deutsche Bank. His career began nineteen ninety-seven as a trainee at Deutsche Bank. Here, he completed various stations in the credit business, including experience in London. From 2006 to 2010 , he worked at one of pbb's preceding companies, his last role in the function of chief information officer. He then went on to hold a number of positions at Postbank, among others, that of the chief credit officer. He then became a member of the board and chief risk officer at Deutsche Bank, Privat- und Firmenkundenbank AG. With this introduction, I hand over to you, Kay.
Thank you, Michael. Good afternoon, ladies and gentlemen, and a very warm welcome from my side as well to our Capital Markets Day. I'm delighted that you are taking the time for joining us. Today, we will give you a deep dive into the further development of our business model that will, you know, aims to provide pbb with greater diversification and more profitability. We will hope that you will leave later today with many new insights and the impression that pbb is on the right track. For me, this is my first Capital Markets Day at pbb. I have been on board for roughly eight months now, and a lot has happened since. We have, of course, devoted much of our management capacity and resources steering the bank through this challenging market environment, and without wanting to preempt our Q3 results, I believe we have done quite well.
We remain on track to achieve our key targets for 2024. I already announced in March, when presenting the annual results, that we would be reviewing our strategic positioning. From the outset, I came here with the clear intention to further develop the bank's business model. I have found a bank with a robust platform and a very, very strong customer franchise, but it is always my intrinsic motivation to change something good to something better. Of course, the intensity of the market developments this year and last year made us think hard about the lessons to learn and how we can better prepare ourselves for future cycles. Certainly, one is our relatively strong presence in the office market.
As one of a very few listed real estate financing houses, we have felt the uncertainty among investors about the fall in prices in the office market, especially in the U.S., and this more than other market participants. With this and other learnings, we as the management board had to ask ourselves very self-critically which strategic adjustments are necessary. Of course, no company involved in real estate financing can fully escape the cycle, and this holds particularly true for a specialized financing house like ours. Nevertheless, it is in everyone's interest to reduce the volatility in the business and therefore reduce the volatility in earnings. In short, we had to ask ourselves questions and find answers to the following: How can we position ourselves to deliver more resilient results through the cycle? How can we better benefit from evolving market trends?
How can we ensure that our earnings are less volatile, and how can we improve profitability? How can we earn our cost of capital in the long run? In other words, how can we create more value for you, our investors? We will deliver answers today. The good thing is, we don't need to reinvent the bank. We are not presenting you with a revolution today. Rather, it's an evolutionary development that will allow us to make even better use of what we do best: servicing commercial real estate clients, to create new sources of income, and to put our business on a broader and, above all, more profitable footing. Or in short, we strengthen our strength. To be clear, we will not be experimenting outside the commercial real estate market, but leverage our core competencies. Our expertise in commercial real estate market is undisputed.
Even though the market has been more challenging recently, we have a strong track record in financing commercial real estate across geographies and asset classes. We have long-standing relationships with a wide range of clients in Europe and in the U.S., and this includes real estate developers and institutional investors. We have invested in our operating platform, and we have highly experienced staff, as well as a technological infrastructure that includes databases that are fed with data for decades. Finally, our sourcing and structuring expertise is widely recognized in the major European countries and in the U.S. All of this is highly valued by our clients. In short, we have a unique platform with a strong client franchise, but we have to admit that we have by no means exhausted its potential. This is because we are only addressing a fraction of the market in which we operate.
As you know, in normal times, we generate EUR 7 billion to 8 billion of new business in Europe. This is only about a tenth of what actually we get on our tables for review because of our strong position. That's around EUR 90 billion , and even that is only a fraction of what the real estate industry moves every year in Europe. Last year, new business in the European real estate financing reached a volume of around EUR 560 billion . That was at the cyclical low. Before that recent downturn, the market as a whole had a volume of almost EUR 800 billion . We are not the only ones that are confident that market will return to those levels in the coming years. As pbb, we therefore continue to operate in a recovering growth market.
Behind the expected market growth lie a number of structural trends and shifts that are of considerable importance for our future strategic direction. In particular, we see three major themes. First, the weighting of individual asset classes in this growing market will change significantly. Just think of the increasing importance of hybrid work arrangements, the strong growth of e-commerce or cloud computing, or of new living concepts for young people due to the lack of affordable living space, and the aging of the population in the developed world. These are just some of the macro trends that will give much greater weight to some asset classes in the future, such as senior housing, serviced living, and data centers. It would be unwise for us not to use our financing expertise to take advantage of those structural changes. We already have the relevant expertise in-house.
Second, we have seen for some time that more and more non-banks, such as asset managers, insurance companies, and alternative lenders, see commercial real estate financing as an attractive asset class. In the U.S., around half of the real estate financing is already provided by this group. In Europe, banks still dominate this business, but we believe that it is only a matter of time before the market structurally changes here as well. It would be unwise for us not to use our client franchise and our structuring expertise to take advantage of these developments, i.e., to offer those strengths to others for the benefit of our clients and for you, our investors. And third, sustainability criteria are increasingly influencing investment decisions and property valuations. The market has demonstrated this very impressively during the downturn.
In addition, we see increasing regulatory requirements that need to be addressed by our clients. With our passion for sustainable finance, it would be unwise for us not to take advantage of this development. Ladies and gentlemen, this gives you an idea of where we plan to adapt and strengthen our business model. We have the know-how and expertise to capitalize on the market potential in all of those fields. Our Strategy 2027 builds on three key pillars. First, we aim to strengthen our core business by expanding our new business into growing asset classes and by increasing our focus on return on invested capital, or in short, improve profitability in our core financing business.
Second, we have started to build a relevant fee business by leveraging our market expertise, as well as our strong sourcing and structuring capabilities to serve and partner with third parties in several ways, or in short, diversify our earnings base. And third, we aim to make our operating platform even more efficient and scalable by adjusting to our new business strategy and by continue to make use of technology, including AI. We aim to do all of this with a strong focus on Europe. We will not withdraw from our clients in the United States, the world's largest real estate market and investment pool. However, our strategic initiatives are now primarily focused on the European commercial real estate market, where we are deeply anchored. But first things first.
Our Real Estate Finance Solutions business, the commercial real estate financing on our own balance sheet, is and shall remain the backbone of our company. Over time, however, we aim to significantly change the composition of our portfolio through new business. We expect that in future, a significant proportion of new business will come from asset classes such as serviced living, senior housing, and data centers, but we also want to focus more on logistics and hotels. On the other hand, we aim to do less new business in the office and residential sector. In short, we aim for a more balanced and more stable overall portfolio. My management board colleague, Thomas Köntgen and Walter Hampel, our head of Real Estate Finance in Continental Europe, will introduce you to the details of our Real Estate Finance Solutions business.
In addition to this core business, we plan to continue to establish Real Estate Investment Solutions business. This will bring together all of our off-balance sheet offerings, creating the fee income for the future. Going forward, there will be two pillars to this business. The first pillar will be pbb Invest, our investment management offering, which we have already presented to you in the past. My management board colleague, Pamela Höhr, will introduce our plans in depth. The second pillar will be our new offering, Originate and Cooperate, through which we intend to monetize the rapidly growing non-bank lending business in Europe. Andreas Würmeling, our head of loan markets, will introduce our plans for this new offering. Both areas are important growth markets for us, where we can build an attractive additional business on our own without using our balance sheet.
We firmly believe that the real estate investment solutions business will enable us to create more balanced and better diversified income base. The third pillar is the ongoing reduction in our non-core portfolio, the former public finance business. This forms part of our active balance sheet management, and we will continue to reduce this portfolio in a value-preserving manner. In addition, we continue to drive forward our ambition to play a leading role in the transformation of the commercial real estate industry towards a carbon-neutral future. Green financing is an important element in all our strategic initiatives. As we diversify our business, there will naturally be an impact on our operating platform. We remain committed to our previously communicated cost reduction targets. The optimization of the real estate finance portfolio, though, will open up further savings potential.
These savings allow us to invest in, and therefore self-fund, our new business areas. In terms of capital distribution, we aim to become an attractive investment again, and even more focused on sustainably increase shareholder value. Going forward, we plan to distribute a minimum of 50% of distributable income. Next to cash dividends, share buybacks will be added to our distribution strategy. With that, we want to continue to provide a solid cash element for investors, but supplement this with a share buyback component to attract an even broader investor base. So much for now from my side. My colleagues from the management board team will now take you through the strategic update in detail, and our CFO, Marcus Schulte, will run you through the financials. And with that, Michael, I hand back to you.
Thank you, Kay. As said, we will now come to the deep dives and presentations on the future strategic levers. We will start with Thomas Köntgen, followed by Walter Hampel, on the diversification and profitability increase of our core on-balance-sheet business, commercial real estate.
Ladies and gentlemen, a very warm welcome to our Capital Markets Day, also from my side. My name is Thomas Köntgen. I am responsible for PBB's Real Estate Finance Solutions business. I've been in the industry for more than 35 years, working for different large institutions, and joined PBB as a member of the management board in 2014. As you can imagine, I've seen quite a few commercial real estate cycles. It is my firm belief that it is possible to steer a commercial real estate specialist, like PBB, through all parts of the cycle if you are close to your customers and have the right team, a proper strategy, including risk management, and enough professional stamina. Equally important is the willingness to learn from the past cycle and continue to improve. As you can imagine, I've seen quite a few commercial real estate cycles.
It is my firm belief that it is possible to steer a commercial real estate specialist, like PBB, through all parts of the cycle if you are close to your customers and have the right team, a proper strategy, including risk management, and enough professional stamina. Equally important is the willingness to learn from the past cycle and continue to improve. This is what we have done while working on our Strategy 2027, and I'm looking forward to walking you through the key elements of the real estate finance parts of it. Our Real Estate Finance Solutions remain the backbone of our commercial real estate platform franchise. This is our expertise. This is what we are passionate about, and we seem to be doing a good job.
Feedback from our clients consistently highlights our strong delivery capabilities, our ability to structure complex deals, our customer focus, and our partnership approach. I have to admit that we are a little bit proud to hear this, and indeed, we see ourselves as a partner to our clients at all stages of the cycle. During the current cycle, we have learned that we need to alternate our portfolio composition to stabilize both our book and our risk profile. At the same time, we need to increase the profitability of our real estate finance business through more value-oriented steering. As you know, 2023 and 2024 have been challenging years for the commercial real estate business, with the resulting decline in volumes. We expect this to change beginning next year. Already now, we see first signs of recovery.
When we look at the total commercial real estate market in Europe, we expect to see EUR 770 billion of new financings by 2027, up from an estimated EUR 600 billion this year. This would mean that the total commercial real estate market in Europe would finally exceed pre-COVID volumes. This is good news. There's growth potential for a specialized lender like pbb. At the same time, the commercial real estate markets are undergoing structural changes that will open up attractive business opportunities and new asset classes, allowing us to significantly strengthen our profitability. If we look at the structural changes, we see a strong differentiation in almost all asset classes. Let me briefly take you through our observations. In the office sector, we continue to see a run for ESG-compliant properties in core locations that is unaffected by the general trend towards home office.
Demand for high-quality, ESG-compliant office space in prime city center locations remains strong and is even increasing. When people come to the office, they want attractive spaces. Given the shortage of skilled workers, this trend is likely to continue. When we look at retail and logistics, the pandemic has massively exacerbated the trend towards online shopping. This hits large retail units and supports logistics, or, to put it this way, retail's weakness is logistics' strength. Again, we see strong differentiation in both asset classes. Logistics offer a wide range from very large hyper facilities to much smaller last-mile logistics. Large retail units in city centers and peripheral locations are struggling, but there are smaller, specialized shops, including luxury goods, that attract customers. If we look at residential, we see two trends emerging.
People still want to live in cities, and the baby boomers in Germany, in particular, occupy an average of 60 square meters per person. As a result, space is limited and prices are high. Younger generations, on the other hand, are much more mobile than their parents. They move more often, spend time abroad, especially to study, and choose smaller apartments in order to live in the city. This can also take the form of serviced living. We expect both of these trends to continue. At the same time, people continue to travel, a phenomenon that has increased massively since the pandemic. One of the reasons for this is increasing wealth, particularly in Asia, and this supports hotels, especially city hotels, which can respond to changes in demand much more flexibly than large resort hotels.
In addition to these traditional asset classes, newer segments such as data centers, serviced living, and senior living show attractive potential. You will hear more about this in a moment. Based on a thorough analysis of all these structural changes, we see significant potential for our profitability when we further diversify and optimize our portfolio composition, both in terms of asset classes and in terms of regions. Independent of individual asset classes, eco remains an important area of focus for us. Kay touched on this already. This year, we reached an important milestone in our green transformation, achieving the 75% transparency rate of the core portfolio set for the end of 2024, already in the Q1.
Approximately 23% of the total portfolio is, on the basis of our green loan framework, currently eligible for green loans, and we remain committed to increase this to 30% by 2026. If we look at our geographic focus, today, we have 47% of our portfolio in Germany. The next three large markets are France, the U.S., and CEE. Looking ahead to 2027, Germany will continue to be the largest market for us, but it is targeted to be between 40% and 45% by 2027, and we expect to see a greater degree of regional diversification across our European markets. We intend to refocus and reduce our business in the U.S., but have decided to continue to serve the largest and most liquid real estate market. We are on track to refocus our operations in New York, where we have a representative office.
In the future, the focus will be on the three major East Coast cities of New York, Boston, and Washington, D.C., with an expanded focus on multifamily housing and hotels. With regards to the office segment, we will look strictly at Grade A office properties. In addition, logistics along the East Coast of the U.S. is likely to be of interest for us. However, we aim to pursue a very focused strategy, limiting our new business to the East Coast gateway cities and focusing on prime asset quality and sustainable cash flows. In Europe, outside Germany, we also aim to further diversify our portfolio. CEE and France will be key markets. My colleague, Walter Hampel, will walk you through some details in a moment. Our strategy for Germany, our home market, with the deepest franchise, will focus on sustainable profitability.
We consider ourselves to be very well placed here with our franchise and will build on this strong foundation by further diversification, while at the same time raising profitability, and with that, I hand over to Walter.
Thank you, Thomas. Dear investors, dear analysts, dear all, it is a pleasure to speak to you today and to share a few insights into our core business. My name is Walter Hampel, and like Thomas, I have been active in the real estate lending business for more than thirty years. I joined one of PBB's predecessors some 25 years ago, and today, I'm responsible for PBB's real estate finance origination in continental Europe. As Thomas has just described, we are seeing structural changes in the commercial real estate markets that are creating attractive business opportunities for us. He has already walked you through the more traditional asset classes. I will focus on additional newer asset classes, namely data centers, serviced living, and senior living. These used to be called alternative asset classes, but they're fast becoming mainstream for investors.
This is not surprising, as they are supported by the mega trends of digitalization and demographic developments. Let me start with data centers. Although this asset class has been around for a while, it has seen impressive growth in the last couple of years, driven by recent technological trends. First and foremost, of course, is the development of artificial intelligence, but also the growth of cloud services, for example. To give you an idea, the global financing requirement for new data centers to be built between 2024 and 2028 is estimated at almost EUR 1,000 billion. Although only a small part of this will be relevant for PBB, we see great potential in this asset class.
We'll start looking at data centers in Germany, the United Kingdom, and France, and we'll focus on that part of data centers that are real estate related, meaning the building and construction features related to it, for example, cooling, energy supply, and backup systems. The second asset class is what we call serviced living, which includes student accommodation as well as other forms of residential assets dedicated to shorter stays. One of Europe's strength is our high quality and diversity of education. Consequently, there is growing demand for student housing, especially for programs held in English. We see a general undersupply of purpose-built student accommodation across Europe, coupled with an overall increase in student numbers. At the same time, there's growing demand for flexible, short to medium-term accommodation for other parts of the population. For a specialized commercial real estate lender such as pbb, this is a very attractive segment.
Finally, we are an aging population with a social trend away from home care. This supports senior living, including both assisted living and care homes. At pbb, we have financed assets in all three categories in smaller transactions in the past. We will use this experience to grow in these sectors and to increase the profitability and diversification of our portfolio. We intend to start financing data centers in our core markets, Germany, the United Kingdom, and France. In senior living, we initially aim to target Germany and the U.K., and the first market for serviced living will be Germany, the U.K., France, Spain, the Nordics, and Benelux. This brings me to our Strategy 2027. As you have heard, our overall objective is to increase the diversification and profitability of our core portfolio.
While we will continue to generate new business in all European markets in which we are currently active, the composition of our portfolio will change. Although our exposure in our largest market, Germany, will decrease somewhat in percentage terms, it is expected to remain our largest market. In continental Europe, France and CEE will be our focus markets. In France, we intend to reduce our share of office financings and focus on green office properties in core locations. Expansion areas are hotels, serviced living, and logistics. As France is the second largest market in continental Europe, we are confident that we can continue to grow our business there profitably. Central Eastern Europe, and Poland in particular, is one of our most profitable markets. In CEE, we serve mainly international clients with a strong focus on logistics. I will now hand back to Thomas. Thank you very much.
Ladies and gentlemen, as you can see, there's quite a bit of change ahead, and I'm looking forward to implementing this strategy together with the team. The target picture is a more focused, diversified, and, as a consequence, more profitable real estate finance portfolio of EUR 29 billion with an elevated gross margin. Finally, let me conclude with some remarks on our risk profile. PBB is, and will remain, a senior lender. As such, we always enjoy priority as a creditor, concentrating on the first-ranking part of financing. This is worth emphasizing, given that a significant proportion of commercial real estate finance does not rely on first-rank claims. We will continue to stay out of these areas. We aim to maintain a balanced portfolio mix. This requires constant monitoring and mitigating economic, political, regional, and regulatory developments, and the resulting changes in the commercial real estate markets.
By doing that, we can flexibly adjust our portfolio management and new business activities as needed. This is an important part of our Strategy 2027, and a lesson learned from the past. In a cyclical asset market, clear strategic guardrails are essential. We must also have the flexibility to embrace asset class trends and respond to market developments. I am very much looking forward to implementing our Strategy 2027. This will be an important and equally exciting task for my team and myself, and we are fully committed to delivering on this.
Thank you, Thomas. Thanks, Walter. As we remember from Kay's presentation, in addition to the more diversified and profitable core business, the second important lever and focus is the fee-generating off-balance-sheet business, bundled in real estate investment solutions. It comprises the two main business lines: fund business and pbb Invest, and CRE business origination and services for others, namely Originate & Cooperate. This will now be presented by Pamela Höhr and Andreas Würmeling.
Ladies and gentlemen, my name is Pamela Höhr. On the management board of pbb, I'm responsible for HR, ESG, property analysis and valuation, and investment management. I joined the bank in April 2023 and became a board member this year. I've worked in the real estate industry for 25 years now. Before joining pbb, I was a member of the management board at Real I.S., BayernLB's real estate investment manager, responsible for fund management, asset management, and the local branches. Prior to that, I worked at Patrizia, where, after the various M&A transactions, I merged the asset management teams into one department in Germany. Later, as a member of the management board and country head in Luxembourg, I was responsible for the AIFM and fund management, transforming it into a scalable platform.
So you see, my passion is real estate in general, and in particular, real estate investment management and asset management. I'm specialized in building up new business streams that generate fee and commission income. That is why I was immediately interested when pbb approached me with the opportunity to establish such an income stream. And I'm excited to build up the new real estate investment solutions business together with an excellent and dedicated team, and to design new product offerings for our new target client group, institutional investors. Let me start by outlining the building blocks of what we call our real estate investment solutions business, the new strategic initiative in our Strategy 2027. This business comprises pbb's fee business and is built on two pillars: our asset management business, pbb Invest, and Originate & Cooperate, through which we intend to offer deal sourcing and loan servicing.
With this new real estate investment solutions business, we intend to offer services along the full value chain for institutional investors, including fundraising, origination, underwriting, loan servicing, investor reporting, and fund services. And in the next few minutes, I will focus on outlining our strategy for pbb Invest, and my colleague, Andreas Würmeling, will then introduce you to our new Originate & Cooperate business. As some of you might remember, we announced plans to launch an investment fund offering as early as the end of 2022. However, given the increasingly challenging market environment, we had to adjust our plans, and still, we have made good progress. In October 2023, we onboarded a hand-selected team of senior investment professionals with expertise covering the entire value chain, from fundraising and asset sourcing to fund and asset management through to fund services.
With this very experienced team, we are working on debt and equity solutions for institutional investors. Initially, we planned for equity funds. However, in the current market environment, we are focused on a debt product, as it offers a more attractive risk-return profile. The team has created a debt fund that meets the current needs of institutional investors. In addition, we are bringing into our offering our knowledge and experience in green finance. For our pilot debt fund, we have used pbb's market access to fill a pipeline of EUR 500 million of loan applications in just three months. We are targeting pan-European whole loan financings with an LTV of around 70% based on the currently adjusted property values. So this is a conservative product with a whole strategy.
Our aim is to generate an attractive risk-return profile, and very importantly, the loans will not come from pbb's existing portfolio, but will be new deals sourced in line with our fund's investment strategy and on behalf of our investors. The target volume is between EUR 300 million and EUR 500 million in commitments. And we have recently started sounding with initial investors, and the feedback so far is they appreciate our track record, and they are quite impressed by our pipeline, our access to the markets, and they like the asset quality and investment approach. So we are therefore confident to make progress in the coming months. Looking across the investment management markets, we see four main drivers. First, compared to the peak in 2020 to 2021, we expect pressure on the funding markets and lower than required levels of fundraising through to 2028.
Second, we see buy-side opportunities as banks reduce their lending. This opens up opportunities for private debt financing and distressed asset investments. Third, there's growing interest in non-traditional asset classes, such as data centers and healthcare facilities. Finally, investors are increasingly seeing better risk-adjusted returns from debt strategies than from equity investments. Therefore, we are in a good position to establish a successful fund offering, even if the uncertainties in the market are not yet over. In general, real estate investment management has significant potential. From 2018 to 2023, the global fundraising environment was at EUR 1,500 billion on average, of which EUR 170 billion was real estate fundraising, and EUR 42 billion were raised in Europe, and that is our first target market.
PBB's U.S.P is our in-depth expertise in all relevant asset classes, from office to logistics, retail, residential, up to hotels. With our 700 colleagues in 10 offices, we are in the local markets with experts, not only from origination, but also from underwriting, risk management, and valuation. Thus, we are well connected with long-standing client relationships, and we have a proven track record in the markets. To this, we add our in-depth ESG expertise. So based on all this, we are now expanding our product offering for institutional investors with real estate investment management solutions, ranging from real estate investment management to originate and cooperate. As Kay said in the beginning, our strategy is built on both organic and inorganic growth. This is particularly true for our investment management business. Organically, we are working to accelerate through dedicated debt and equity products.
In parallel, we are looking for inorganic growth and are screening the markets for an acquisition within our core segments. We are looking for players with a proven track record and a company culture that is compatible with pbb, so that we would further strengthen and complement our investment management proposition and add a significant amount of assets under management and profits. The target assets under management growth by 2027, aggregated across all funds, is based on an expected improving market environment, and we target between EUR 4 billion and 6 billion assets under management. We are a passionate team dedicated to making pbb Invest a success, and I'm excited about the road ahead. I would now like to hand over to Andreas Würmeling, who will present Originate & Cooperate. Thank you.
My name is Andreas Würmeling, and I'm responsible for loan markets here at PBB. I joined the bank in 2006 and have worked mainly in London and Munich. I have thus foreseen many changes in different markets and cycles, with many challenges and solutions around it. My team covers all the debt markets PBB is active in, and our focus is on our commercial real estate partners on the lending side: banks, insurance companies, alternative lenders, and so forth. I will now introduce you to our new Originate and Cooperate offering and look forward to walking you through our plans. The basic idea is clear, simple, and compelling. We will start offering to others what we do for our own business anyway: sourcing, structuring, as well as execution, and if needed, servicing or management of commercial real estate loans.
This is in line with a general trend which we are seeing, which is a change in the market structure as the share of bank-financed commercial real estate shrinks. At the same time, non-bank commercial real estate financing is increasing as new players enter the market and existing alternative lenders have to deploy even more capital in the form of debt than in the past. They are looking for suitable deals and quality deal execution. We are seeing increasing demand, particularly from the U.S. and Asian clients, coming through the large international asset managers, sometimes through their own lending platforms. They are all looking for private debt exposure, but they do not necessarily have client access or loan origination and execution capabilities. As you can see on this slide, the revenue potential is very attractive. Access to deals is key for them, and this is mainly done via loan brokers.
Today, broker business accounts for around 20% of the commercial real estate market, but 80% of lending in Europe is done directly with clients. pbb is perfectly placed to play a significant role in this context, as we have access to brokers, but more importantly, robust and market-wide access to clients and markets across Europe. With a local presence in all key European markets and local teams of in-house real estate underwriters, property, and legal experts, as well as local loan management and our network of external advisors, debt investors can benefit from our long-term experience in sourcing, executing, and managing loans with local expertise. Collaboration can take the form of joint lending or mandates to provide deals that meet specific investor requirements without pbb being directly involved as a lender.
The products can range from pure loan sourcing to deal structuring and underwriting, handling of loan documentation, and the closing process, as well as post-closing loan servicing or management. Our target clients are investment managers, institutional investors, and family offices looking to enter the European market or expand their exposure through a broader client and deal reach and ongoing management of the loans with a local real estate specialist partner, such as ourselves. We have already been approached by such investors and are in advanced discussions with a number of potential partners. As a result, our current expectation is that we can soon be in deal mode on the basis of this approach.
The benefits of combining our core expertise with the opportunity to grow our off-balance sheet revenues, and also to broaden our lending offering to our real estate clients by having access to more loan sources than just our balance sheet, are obvious. We are committed to investing in such strategy, expanding our teams, and pursuing it as a long-term approach and with a long-term strategic relationship. Another way in which we are diversifying our business is through the continued development of our ESG ecosystem. As you can see on this slide, there is significant client demand in this area. The reasons are obvious. There is increasing regulatory pressure and a general demand for transparency from various stakeholder groups, combined with the need for operational efficiency in real estate and value protection.
Beyond advanced ESG data collection and in-house analytics, as well as our green lending program, we will therefore continue to focus on expanding our Manage to Zero product offering for our clients and the wider market. Our joint venture with Groß & Partner, Eco Estate, started successfully, and we will build on this. In particular, we will continue to focus on standardized ESG due diligence, transition concepts, and in particular, the transition support of the real estate itself. We will also focus on expanding our client base and market presence. At the same time, we will explore further opportunities to offer solutions around ESG data and analytics. So as you can see, there is more to come in the coming months and years. My team and I are enjoying this work tremendously, and I look forward to sharing news and results with you in the future.
Thank you very much for your attention.
Thank you, Pamela. Thank you, Andreas. With that, we have covered the strategic deep dives on the business side. How this translates into figures and KPIs 2027, of course, this will be presented by our CFO, Marcus Schulte. Marcus Schulte has been a board member since 2019. He joined PBB as senior general manager at the beginning of 2017 from Credit Suisse, where he acted as head of European financial institutions and as deputy head of EMEA Debt Capital Markets. Before he joined Credit Suisse, he worked for Bank of America Merrill Lynch, Europe. He took over the CFO function within PBB end of last year, in addition to his responsibility for Treasury. Please, it's your floor.
Thank you very much, Michael. Ladies and gentlemen, a warm welcome also from my side. It's great to have the opportunity to acquaint you with our revised strategy. I'm looking forward to walking you through to our key financials of our strategy 2027, and then I'm especially looking forward to your questions later today, as I'm convinced dialogue remains key. Allow me to start with an overview of our expected KPIs by end of 2027 As you've heard, we aim to increase our operating income by strictly focusing our balance sheet on profitability. The freed-up resources will allow us to leverage our platform by building a meaningful fee business. By the end of twenty twenty-seven, we aim to increase our operating income by approximately 10% to around EUR 600 million.
By then, 10% of our income should come from our fee business, i.e., our real estate investment solution business. At the same time, we aim to maintain strict cost discipline. We are on track with the execution of our previously communicated cost reduction targets and measures. In addition, we aim to make our platform even more efficient and scalable, enabling investment in our fee business. In total, by end of 2027 , our cost basis shall be reduced, and our cost-income ratio should be lowered to our long-term ambition of below 45%. With this strategy of increasing profitability in our Real Estate Finance Solutions, adding meaningful fee income from our real estate investment solutions and reducing costs while still investing in diversification, we expect to increase our overall profitability to 8% return on tangible equity by end of 2027
As Kay Wolf said, this target is the first ambitious but realistic milestone in our long-term journey to fully earn our cost of capital. Systematically driving ROTE growth to support pbb's valuation is a key pillar to sustainably increasing shareholder value. The second key pillar to support shareholder value is capital distribution. Our strategy provides for an attractive distribution potential. That is, a planned distribution of at least 50% of distributable income until and including 2027, including share buybacks, which of course, are subject to the ECB's prior approval. At the same time, given the cyclical nature of commercial real estate markets and to maintain strategic flexibility, we aim to maintain a solid capital base with a CET1 ratio of at least 15.5% by end of 2027.
Now, let us take a closer look at the drivers of our KPI on the next page. Let me start with our operating income. On the balance sheet, we will continue to focus on our core business by strategically reallocating resources from non-core to the real estate finance solution business. This is expected to result in a declining top-line contribution from the non-core portfolio. However, this decline is expected to be offset by higher quality NII from the higher margin and strategic Real Estate Finance Solutions business. Our Real Estate Finance Solutions business will be managed with a strong focus on return on capital and is expected to be delivering a higher top and bottom line from an optimized real estate portfolio. In addition, we aim to grow the capital light off-balance sheet fee income business in our real estate investment solutions.
This business is expected to grow to a 10% contribution of total operating income by end of 2027. Real Estate Investment Solutions is not only expected to be ROTE accretive, but should also diversify our business model and thereby strengthen our resilience through the cycle with growth potential beyond the balance sheet. Overall, as said, we are targeting an operating income of around EUR 600 million by end of 2027, representing an ambitious, but at the same time realistic, CAGR of 4% per year. Let me elaborate on the underlying balance sheet dynamics on the next page here. First, I will focus on the asset portfolio. The development of the on-balance sheet asset portfolio is a very reflection of our very focused approach to the balance sheet.
As just mentioned, we want to reduce our non-core portfolio in a value-preserving manner through a balanced mix of maturities, opportunistic and value accretive asset sales, and corresponding liability buybacks. Of course, mostly public sector covered bonds. On the other hand, we aim to strictly focus on ROTE accretive Real Estate Finance Solutions business. Meaning that our optimized core portfolio should stabilize around the current H1 2024 level of EUR 29 billion, while generating, as I said, both higher top and bottom line contribution. As a result, the overall balance sheet should become leaner. The share of ROTE accretive core business is expected to increase to around 80%, and the share of non-core portfolio is expected to decrease to 20%.
With that, I would now like to move to the corresponding funding side, which is expected to also contribute to the increasing operating income because of optimized and lower funding. Both the optimization of our core portfolio and the reduction of our non-core portfolio should reduce our overall funding going forward. Our main source of funding is and remains our secure funding of well above 50%, mainly through our highly resilient Pfandbrief product. Unsecured funding should continue to represent around a third of our funding. We aim to keep unsecured funding balanced between retail deposit and wholesale capital market funding. It is therefore our strategic ambition to maintain our presence in the unsecured wholesale market, and we intend to issue at least one green senior benchmark per year from twenty twenty-five onwards.
Considering lower overall funding needs, it should then be sufficient to keep our retail deposits fairly stable from our expected year-end level of around EUR 7.5 billion. Overall, we continue to use the full breadth of our funding toolbox and expect to maintain a well-diversified and balanced funding mix. And of course, we aim to ensure sufficient liquidity buffers for a still cyclical business model. In addition, funding spreads are also expected to come down a bit, supported by improved real estate markets and moderate needs across all the various instruments. Such optimized balance sheet shall of course be supported by solid capitalization. As you know, we are an early mover in the process of transitioning our core commercial real estate portfolio to the Basel IV Foundation IRBA framework. In that transition, we are currently applying standardized risk parameters for a transitional period.
On this basis, we delivered a CET1 ratio of 14% in the first half year of 2024, in line with our previous guidance and in line with our long-term ambition of 14% through the cycle. On a pro forma basis, this translates into 3% higher CET1 ratio of 17.2% under the Target Basel IV Foundation IRBA framework, which we expect to apply from 2025 onwards, following prior ECB approval. This solid starting position in our capital ratio, combined with growing recurring income, profits, and a focused asset portfolio, allow us to invest in our strategic diversification, including the planned M&A for pbb Invest. At the same time, our strategy includes attractive capital distributions.
As a result, we expect to maintain a solid capitalization with a CET1 ratio of at least 15.5% by end of 2027, well above our minimum ambition of at least 13% through the cycle. This gives us an expected MDA buffer of 550 basis points. Such buffers are prudent and at the same time appropriate, given the cyclicality of markets in which we operate, and it provides us with the strategic flexibility we wish to maintain. With that, let me leave the balance sheet and turn to the key risk and cost drivers. As real estate markets slowly bottom out and recover, we expect risk costs to come down. This general trend should be supported by two pbb-specific factors. First, we aim to maintain a rigorous approach to risk. We want to reiterate that.
Specifically, we will continue to focus on senior lending only, and we will focus, as said, on the known transparent markets in Europe and the U.S.. Second, we plan to optimize our portfolio by reducing concentration risk, through reducing the share of office and reducing the share of U.S. business. At the same time, we aim to diversify our portfolio by adding new growth asset classes, as Kay elaborated. As a result, we expect our cost of risk to normalize to pre-COVID levels of circa 15 to 25 basis points by the end of 2027. With that, let me now turn to our operating costs. What are the drivers here? First, we want to maintain strict discipline in the execution of our already committed cost measures.
The planned temporary increase in cost, driven by investments in IT transformation and the digitalization of our credit decision process, are expected to fall away from 2025 onwards and should then generate the envisaged significant savings, putting us on track to achieve a cost-income ratio of 45%, but second, as we diversify our business, there should naturally be an impact on our operating platform. The optimization of the real estate finance portfolio is expected to bring savings potential. Optimizing operations by building a more flexible, international, and efficient platform should result in additional cost savings in the low double-digit millions. Overall, we expect savings of nine percentage points in the cost-income ratio, or around 20% from the end of 2024 , including the already initiated cost measures.
These savings should allow us to self-fund our investment into diversification in the real estate investment solutions business areas. However, around a third of cost savings is not planned to be reinvested and should result in a lower absolute cost base, contributing to our long-standing CIR target of below 45%. In short, we plan to fund our investments by cost savings. This should result in higher operating income from a lower net cost base. Before summing it all up in our return ambition, let me explain that in measuring return, we decided to move to the more focused return on tangible equity measure, aligning with common practice in and outside Germany. In summary, we expect our Strategy 2027 to increase our ROTE from the expected level of below 3% by the end of this year to 8% by year end 2027.
As outlined by now in great detail, there are, in summary, two main levers: First, an increase in the profitability of our core finance business through portfolio optimization and expansion into new asset classes. While funding costs are expected to support and risk costs are expected to normalize. In addition, we should be able to crystallize further upside in cost savings from a more flexible, international, and efficient platform. In total, we aim to increase the return on tangible equity in Real Estate Finance Solutions by around four and a half percentage points. Second, we expect to add another 1% ROTE from leveraging our expertise and platform by diversifying into fee income in our investment solution business. This capital light, off-balance sheet business is expected to be highly ROTE accretive. It includes our offerings, pbb Invest, as well as Originate & Cooperate.
In summary, we expect to drive profitability in and beyond our core business, targeting a significant increase in return on tangible equity to 8% by end of 2027, with further potential beyond that. The aforementioned levers and drivers of our strategy also allow for attractive capital distribution potential, whilst at the same time ensuring robust capitalization and self-funded investment into growth. Kay has elaborated on that. Here you see the illustration. Overall, we see an attractive capital distribution potential of at least 50% of PBB's IFRS Group profit after tax, attributable to shareholders until and including the end of 2027. At the same time, we intend to expand our toolbox. Going forward, distributions will therefore consist of dividends and share buybacks. In other words, our capital distribution toolbox should include a solid cash element, complemented by an attractive valuation element.
All of this is designed to ensure that shareholder value is increased on a sustainable basis and that pbb becomes an attractive investment again, and with that, I hand back over to Michael and Kay.
Thank you, Marcus. Actually, we are quite fast with the presentations. So this brings me already to the final part from Kay. Please.
Thank you, Michael. I hope that we have given you a very good overview of our strategic direction that we are now taking. We have kind of run you through, ahead of time, the key levers of how we further develop PBB in our Strategy 2027. For sure, today is only the start of a longer journey, but we strongly believe that we are on the right track. The overall objective is clear: to make PBB more resilient, more diversified, and more profitable. With our outlined strategy, PBB clearly shifts focus on return on equity as the key enabler to be an attractive capital market investment over the long term and create value for all of you, our investors. As a first step, we aim a return on tangible equity of 8% by 2027
This is an important milestone on our way to sustainably earn our cost of capital. To achieve this, we know that we need to reduce our almost 100% dependency on interest income. This will not happen overnight, but we now will make visible steps and progress. By 2027, more than 10% of our revenues should come out from our new real estate investment solutions business. We aim to implement our transformation with great cost discipline, so that for 2027, our cost-income ratio should be reduced to below 45%. A stable loan portfolio should ensure that we can maintain a CET1 ratio above 50.5%, including potential acquisitions and an attractive capital distribution. Ladies and gentlemen, let me summarize.
We aim to significantly increase the profitability of our core business by increasing our exposure to growing asset classes and focusing on diversifying our real estate finance portfolio. Second, by 2027, we aim to generate at least 10% of our revenues from our new real estate investment solutions business. In addition to pbb Invest, our new offering, Originate and Cooperate, is designed to be a second pillar for this strategy. And third, we remain committed to our cost reduction targets. The optimization of our real estate finance portfolio will open up further savings potential. These savings allow us to invest in, and therefore, self-fund the build-out of our new business areas. The targeted cost-income ratio is below 45% by 2027. In short, pbb aims to become more diversified and more profitable.
Together with the entire PBB team, I will ensure that we will work hard on all these plans to deliver what we presented to you today. The team and myself is looking forward to the future dialogue with all of you. Many thanks for listening, and we are looking forward to your questions later today.
Thank you, Kay. Yeah, quite ahead of time, we will have a 30 minutes break. Welcome back to our Q&A session. I now have all presenting board members with me. So hi, Pamela, and hi, Thomas. Allow me one short comment and correction upfront. At the beginning, I introduced Thomas Köntgen as a co-CEO. To be precisely or precise, actually, Thomas is Deputy CEO. So this upfront. So let's start. We have a lot of questions. So first question comes from Dieter Hein. It's for Marcus, it's for you. Why is your ROTE of 8% target before tax and not after tax? This is a downgrading of your old ROTE target of above 10% for 2026.
Yeah, thank you very much for that clarifying question. Indeed, the ROTE is before tax, and let me say in general that, of course, we were calibrating the strategy and the KPIs to the new environment that we are all operating in, and therefore, it is mixture of, I think, ambition and realism that we came up with in the top line growth of 10% and also in the bottom line with the ROTE. And, I think, the specific considerations on the ROTE and before tax were that most of our peers in and outside Germany actually use the tangible equity measure, and most also use the before tax measure. And we think in particular that before tax is better suited to our business steering. We think in before tax term, and we take out the noise.
But you are right, there is an adjustment and realism in the ambitions that we were presenting today to the new environment that we are operating in.
Thank you, Marcus. Next question is for Thomas. It's from Ibrahim Said: What quantum of reduction in your office portfolio do you have, and at what pace will this be achieved? Do you bake in any potential write-downs in the plan?
Thank you very much, Ibrahim, for that question. Indeed, we plan to reduce the office share of the portfolio to below 40% until 2027, preferably 35%. Regarding the path, I would put it that way: the more the real estate debt markets recover, the easier it is to do so. In so far, I would expect that to start slightly slower than to end it. But we do not have a precise plan saying every six months, two percentage points or whatever. But the clear target is below 40%, preferably 35%. And to the last part of the question, do you bake in any potential write-downs in the plan? No.
Okay, thank you, Thomas. So next question again comes from Dieter Hein: What was your tangible equity in billion at the end of June 2024? What is your cost of capital? It's for you, Marcus.
Yeah, thank you very much for that question as well. That's a relatively easy answer here, short answer. Tangible equity is around EUR 3 billion, and we see our cost of capital in the context of 10%, which you can also see, I think, on publicly available data.
Thank you, Marcus. Next question is from Andreas Pläsier. It's for you again, Thomas. Do you stop new business in the U.S., or do you want to enter new asset classes in the U.S.?
Andreas, thank you very much for that one. No, we do not plan to stop new business. U.S. continues to be the most liquid, the most transparent, and the biggest commercial real estate markets. But what we clearly do is to refocus the strategy, and refocusing means that is a valid statement for the entire portfolio, but in particular, and also for the U.S., to reduce the office share in that portfolio. To do so, we will increase our activities in the logistics space, and potentially in the hotel area. The overall plan is to reduce that book from today's 12% portfolio share to slightly below 10% until 2027, and to focus the regional activity to East Coast only.
Thank you, Thomas. Further question from Ibrahim Said. It's again for you, Marcus: "What is the driver for the drawdown in your CET1 from 17.2% to 15.5%?
Yeah, perhaps a two-pronged answer. I think, first of all, we said that our expectation is that the CET1 ratio will be at or above 15.5%, so there's surely also some leeway. And secondly, look, at the end of the day, as we said, we want to grow, we want to invest in our off-balance sheet business in particular, and also the acquisitions and the transitions that are happening there are included in that walk.
Next question comes from Corinne Cunningham. It's for Pamela, for PBB or on PBB Invest. "What would be the expected asset management charge for PBB Invest's new debt fund? What are your expectations for NII, i.e., how are you hedging protecting NII?
In total, for the Real Estate Investment Solutions business, we are targeting net commission income of fees. Usually, that consists of three components. First is one-time fees for origination, underwriting, and structuring. Secondly, there will be a recurring fee stream for the ongoing loan and asset management of the business. Thirdly, there might be performance fees, which depend on the performance of the fund. That is particularly true for PBB Invest, and in total, for the Real Estate Investment Solutions area, we are targeting 10% fee income for PBB.
Thank you, Pamela. Next question comes from Noah Knittel. It's for you, Marcus. "Until now, the dividend strategy was 50% regular dividend and 25% bonus or special dividend until 2025. Please go a bit more into detail, of the change.
Yeah, thanks for allowing me to clarify perhaps a few points here. I think, you're right, 50 plus 25 bonus was the approach we had. Obviously, when you come up with a dividend strategy in the context of a new strategy, again, you are trying to balancing all stakeholders' interest, so an appropriate distribution, and also an appropriate capitalization. We thought that, you know, a minimum of 50% is appropriate with the target lending for the CET1 that I just elaborated upon. And to spice it up, and I think that is a very important element in it, we included a share buyback component.
And to give you a feeling, I think we still think that the cash component, i.e., the dividend, will be the higher part, but it will be spiced up with a share buyback component, so we think it is an attractive package for shareholders still.
Thanks, Marcus. Another question from Noah: "Why stock buyback? What is your key argument?" Kay.
Yes, thanks, Noah, for that question. It nicely connects to your question before that. First of all, when we, you know, reached out to investors and sounded out, it is pretty clear to be an attractive investment with regard to capital distribution. Share buybacks belong to the toolset that investors do expect, you know? So therefore, that's one of the key drivers for us, and it is clearly one of the toolsets that investors do expect, in particular, value investors. So therefore, we enlarge our toolset here, and become, with that, even more attractive for a broader investor base.
Thanks, Kay. We have another question from Noah. This time it's for you, Thomas. "Slide 10, goal of green loans, from around 30% as a target. Why is this area growing so slowly?
Yeah. Thank you, Noah, for that one. Also from my side, I mean, there are two things. First, we have started a while ago to bring the portfolio to a more greener loan or a higher green loan share. So the 25% is nothing, so to say, that we do have and start from here, we already started that. That makes maybe a little bit gives a little bit better of an understanding of how achievable or ambitious the 25% currently are. Second part of that, looking forward, is then that the 30% is it is an ambitious one. Last but not least, if I may say that, because if you look to the different asset classes, their green credentials significantly vary.
And so far, we have to combine increasing profitability and diversification with getting to our goals when it comes to the green part of the portfolio.
Thank you, Thomas. Another question from Andreas Pläsier: "Does the expected risk cost of 15 to 25 basis points only refer to the 29 billion Rev portfolio?
Hello, Pläsier. The answer is yes, and as you know, I think the additional items that we have on our balance sheet, which is the non-core business, is largely a sovereign or sub-sovereign portfolio with extremely little risk costs, so the answer is yes, the 15 to 25 is for the commercial real estate book only, but the rest is negligible anyway.
Thank you, Marcus. Next question comes from Nicholas. It's for you, Thomas. In light of your recent experience in the U.S. commercial real estate, why not consider a full exit from this market? What is your competitive advantage in this sector?
Yeah. Thank you, Nicholas, for that question to the U.S. portfolio and the strategy. Having thought thoroughly about the market in the U.S., including the experiences that we quite recently made over there, nevertheless, some fundamentals are still very strong. That is not only about the cycle or recovery and when do we expect that, it is, as I said, the most transparent, the most liquid market. We have a very small market share, meaning there's not really a compromise for us, for example, a reason for us to compromise on the revenue side, on the margin side. That is a comparatively good fundamental for us. And second, our competitive advantage, I think, is twofold.
I mean, first, and that is probably the more important one, we are a relationship bank, and that is the feedback we got from our clients, from our European clients we do business with in the U.S., as well as from our national U.S.-based clients, that they really appreciate that. We have a stable business model. We are there, even in more difficult times, to come forward on a constructive basis. And second, and let's put it that way, the bank has an attractive funding mix, so we can get, even in the dollar space, a return that just provides us with what we need on the portfolio in the U.S. and for the overall portfolio.
Thank you, Thomas. We have another question from Noah. Page eleven: If Germany is going down to 30% to 35% share, what is the path for the growth markets like France or U.K.?
Noah, thank you again. I'm not entirely sure of where the 30 to 35 stems from. The presentation, forgive me if I'm wrong, the presentation says that we want to have a stable development in the German portfolio. I might add that that slightly decreases. That could be. It depends a little bit on the future market development, by the way, until 2027 to kind of 40 to 45. I would not be surprised if so, but there's no plan to significantly decrease the portfolio. Not at all.
Thank you, Thomas. I have another question from Noah. It's also for you. By focusing on EU and stay in U.S. due to the big market, why you have no idea to grow in this market as well? If you do, what should be pinpointed?
I mean, as pointed out, I think currently we do have some homework left to do with the existing portfolio first. Second, what we have done is an analysis of the markets, from East Coast to West Coast, liquidity of those markets, particularly based on the experience that we now have made in the downturn of those markets. That is one thing. In so far, I think it is currently for us, it is clearly not a growth story. I think the most important thing is, going forward, that we maintain a portfolio which will slightly shrink, but only slightly, that we refocus on asset classes and on regions in the U.S., and be ensured that we will use the opportunity to earn a decent profit for the bank, even with a portfolio that doesn't grow.
Thank you, Thomas. We have one further question for Marcus. Olivier Ducan: Could you provide more details on your targeted optimization of capital and MREL stack, please?
Yes, of course. Also here, thank you for enabling me to clarify that point. On the respective slide, you see that we are targeting a minimum and 15.5% CET1 and 19% own funds, and that implies, of course, you know, that the respective buckets are filled with 1.5% for Tier 1, and 2% for the Tier 2 bucket, and as you know, the existing instruments that we have, the Tier 1 is, of course, perpetual and therefore efficient. The Tier 2s we do have are beyond their call date, and therefore lose their regulatory capital over time, and we considered in our strategy that these securities would be replenished with new product, and you can see that in that capital stack.
So all capital stacks would then be efficiently filled with Tier one and Tier two, respectively. On the MREL, you know that we are MREL-rich bank. A lot of the legacy product that we have is, of course, MREL-eligible, legacy Schuldschein. That means we have a very comfortable position, but over time, also these will mature and amortize, and we've also considered MREL issuance at the back end of the period in question here.
Thank you, Marcus. Next question comes from Mateo Castillo: Which margins are you targeting on new business, given that the portfolio stock is expected to remain at EUR 29 billion by the end of 2027, Thomas?
Mateo, thank you very much for that one. I mean, very clearly, we have been able, in the last one and a half years, to decently increase margins on new business to the currently 240-ish region. You know, our long-term average in new business, that always has been around 170. By choosing a different composition of the portfolio and of the new business, last but not least, we are convinced to keep that level, average margin, new business, decently above the historic average of 170. Fair to say that if the real estate debt markets will recover more and more, we very likely will nevertheless come down from the current 240, yeah? But the clear target is, aside from profitability.
Clear target is to have that market margin decently above the long-term average of 170.
Thanks, Thomas. So we have a question for you, Kay, from Nicholas: What are your strategic objectives between 2024 and 2027?
Nicholas, thanks very much for that question. I think strategic objectives are clear. We want to increase substantially our profitability in our core business, commercial real estate finance. Real Estate Finance Solutions business, we keep portfolio stable, we diversify the portfolio, and increase profitability there. Second key pillar, we are going to build out our income stream for non-interest income, commission income. That's our Real Estate Investment Solutions business, with on the one hand side, our pbb Invest, to grow that for assets under management to €4 billion to 6 billion until 2027, one part, and the second part is our Originate & Cooperate business, to partner up and to leverage our expertise that we have in a what we expect changing market, where more non-bank financing, capital markets providers are coming in, and we want to leverage on that.
And that will diversify our income stream as a key second objective. And third, yeah, and that is overall profitability. Increase our return on tangible equity to 8%, yeah, as a first big milestone to remain an attractive capital markets investment.
Thanks, Kay. Next question, another one from Nicholas. Could you provide details regarding the planned NCA, so non-core asset reduction, by 2027? Geographical breakdown and execution, natural attrition or disposals or other.
Yeah, thank you also for that question, and again, enables me to elaborate a bit more on what I said. You see in the chart, we are coming down from EUR 11 billion or so to EUR 8 billion. That's EUR 3 billion, roughly EUR 1 billion a year. That is a mixture of what I said, which is maturities. If I start with this, 2027 is a relatively clustered maturity bucket for us. As you know, the portfolio is predominantly Austrian and also some Italian, and especially these two clusters have a maturity, so there's an important maturity component in it. Of course, there's ongoing amortization, but in the back end, 2027, we have some buckets, namely out of Italy, expiring.
Also, we are of course continuing what we did in 2023 and also 2024 year to date, and we'll continue to do this year as well, which is to sell non-core assets that don't fit into our strategy, that make work and value accretive benefits for us. What you didn't cover in your question, what we also do is when we take the asset side down and sell assets, we also reserve the right to buy back the explicit public sector covered bond that is financing it. So it's a mix of all of these components.
Thank you, Marcus. Some further questions for you, from Toby Dodson. Is your 8% pre-tax ROTE 2027 target before or after AT1 coupons?
The Tier 1 component should be out on both the numerator and denominator.
Next question: Does your guided MDA buffer of above 550 basis points assume that Tier 2 are refinanced, and there is no change in your SREP requirement following move to Basel IV FIRB?
The MDA buffer we are giving is expressed on a CET1 basis, if you read it, and for that, this applies. Of course, we at the moment cannot comment on the SREP, which is an ongoing process, as you know. In any event, we think there's a sufficient buffer in that magnitude above MDA.
And-
And as I said, the Tier 2 will be, in the assumption here, also optimized, and then there should be an according buffer here as well.
And last question from Toby for you, Marcus: The 1.7 gap to 17.2 Basel IV IRBA CET1 looks to be roughly EUR 300 million, and you guide to further retained earnings 2024 to 2027. Does that imply an M&A budget of above EUR 300 million?
Thanks, Toby. That's a refined question from the one that we had before. As I said, you know, the 15.5 is an at or above, and there is a buffer. So you're right, that we would have such a buffer. I cannot contradict your math, but we are not necessarily planning for such a high amount, but we would have the possibility to do that. Yes.
So next question, again, from Noah Knittel. Inorganic growth, what area could be interesting, and by M&A, you look on specific markets in Europe, Kay?
Yeah. Thank you, Noah, for that question. And, you know, clarifying, the M&A part is for accelerating our growth in pbb Invest. Yeah, that's where we focus to look with inorganic growth, to grow our assets under management to EUR 4 billion to 6 billion. So we would look at acquisitions, and that would sit in Germany and in Europe. This is the core market where we want to develop pbb Invest, so the M&A activity would be targeted in that area.
Thanks. We have another question for you, Kay. Slide 20, the four times larger third-party allocation, how we evaluate this number due to the size of the overall real estate market?
Yeah, it just shows what we expect is a key trend that continues over the next years. We will see more and more non-banks, yeah, playing a more important role in the European commercial real estate capital markets. What you see there is the current fee pool, and four times that would be the fee pool in the U.S. Of course, the U.S. real estate market is severely larger than the European market, but it just gives, yeah, the clear guidance that with an increasing amount of participants coming from the non-bank sector, the fee pool that sits with that will also grow, and that's exactly what we want to participate in, using that growth to diversify our revenue streams.
Thanks, Kay. Now we have one question for Pamela, for pbb Invest again, from Noah: Please, a bit more about the point assets under management. I understood that the goal is EUR 4 billion to 6 billion. Could you explain this again?
Yes, of course. In the segment pbb Invest, we are targeting, till 2027, a growth to up to EUR 4 billion to 6 billion assets under management. That is composed of two main action streams, basically. First one is the organic business case. That's why we have onboarded an experienced team of real estate investment professionals, and we have worked on the debt fund to launch that organic growth case, so we have everything we need for the organic growth. And secondly, we are working on the inorganic growth, which Kay elaborated earlier. And so in total, approximately half-half, the EUR 4 billion to 6 billion will be built up through organic and inorganic growth.
Thank you, Pamela. Next question: What are the main challenges in greener new business, green loan business, especially in France? It's a question for you, Thomas.
Okay. Thank you very much, Arpita, for that one. I think there are two general challenges, probably. First one I mentioned the other minute, that is that the green credentials of an asset, that is not only a question of age, it is also a question of to which asset class that asset belongs. You have a completely different situation in office compared to, say, hotel industry. That is the first one. The second is that, from the borrower side, we have a kind of different culture, somewhat from country to country, to what level those are used to be asked by banks for the green credentials of the collateral of the asset, and their experience on how to introduce green language in the loan documentations. So I would not say it is a particular French topic.
It is a general topic that producing or increasing the green loan share of the portfolio has a component of which asset class and which country and which cultural experiences people have, business cultural experiences people have, doing that with us. Hopefully, that helps.
Thanks, Thomas. One further question for you, Marcus. It's on risk costs, slide 30: Why is the goal 15 to 25 basis points?
Yeah, thank you for enabling me to clarify that point again. So I think our thinking behind this is that obviously we are having a cycle that is starting to bottom out, and we've illustrated with that chart that obviously we have been having a period of very high risk costs behind us. We are thinking that you know as we go into a very gradual, and I would stress that, gradual recovery, that risk cost should be coming back to something that we had on average before you know the pandemic.
And if you look at the timeline that we showed on that chart before the pandemic, we are not assuming that it goes below to the time when the ECB was at 0% interest rates, but we are assuming that it will go back to the average before that time, which I do think is not an unreasonable assumption, if we go into a cyclical recovery. And I mentioned the two specific effects that are specific to our portfolio, and the most important are, of course, that we are taking we think concentration risk out in the U.S. and in office in particular, so that is in addition to the cyclical structural element. And I think you have a broader diversification, i.e., we're making use of the portfolio effect as well.
That is how we come up with that number.
Thanks, Marcus. Further question from Riad Hanoui. It's for you, Thomas. What is your target in terms of real estate finance portfolio mix, office, logistics, residential, in 2027?
Yeah, thank you very much, Riad, for that question about our diversification strategy regarding the asset classes. I mean, first, as mentioned, there's a clear strategy to reduce the office part of the portfolio from currently 50% to somewhere below 40%, preferably 35%. Then we do have, if I may stay for a second with the traditional, more traditional asset classes, we have a clear intention to grow the hotel share in the portfolio to a level of 10% or more. Resi is a bit of a mixed story, let's put it that way. As soon or as far as it is not pure old-fashioned multifamily, but becomes or have more of a serviced element, and that brings us to student housing, to senior living, we want to increase that.
Mm.
The multifamily part, so pure multifamily without any service component, I would expect that to slightly decrease over time. A word on retail. The retail industry has undergone a decent structural change in the last probably 10 years. Meanwhile, we think after a very decent period of repricing of retail, that there arise opportunities, particularly in the space of factory outlet centers, retail parks, and dominant neighborhood shopping centers, so not the very big super regional ones. We will make use of those opportunities. And logistics is more or less to expect to be stable to slightly increasing, depending a little bit on the opportunities we do see over the next three years.
Thank you, Thomas. So we have a couple of questions now from Eric. Eric, I think as I can see, I think all are for Kay. So first question: Why CET1 target so high?
Hey, thanks very much. I think I would not concur with so high. I think the CET1 target to remain above 15.5% considers our business development. It considers our market expectation, and we deem that as an adequate capitalization for us as a bank with the direction of travel that we are taking until 2027.
Okay, thank you. Next question from Eric, also for you. It said: Why only 50% payout?
Yeah. Eric, a very good question. I would not concur with only 50%. Our payout ratio will be a minimum of 50%, yeah. So we have set the lower end of the range and have not set an upper end of the range.
Last one from Eric: What gives you confidence to create value through 50% retained earnings when our TE is so low? Wouldn't it be better to distribute the earnings, Kay?
I think the right answer is that we are confident with our business strategy that we have outlined today, that we are consistently increase our return on tangible equity. We do that by refocusing and making our core business even more profitable, but we also do that by investing into growth businesses, in particular on the real estate investment solutions side. That creates a consistent increase in return on tangible equity. Beyond 2027, we know, yeah, that we have to do a next milestone, yeah, to develop our business in that direction. For that purpose, yeah, we will deploy and invest capital to get there.
But on the other hand side, we also see the distribution strategy that we are putting in place is an attractive distribution strategy that also ensures that our investors can participate in our consistent increase in Return on Tangible Equity.
Thank you, Kay. Further question came in from Noah. It's for you, Thomas. So if Germany stays stable, 30% to 35%, was one point of the at the beginning, so what is the goal for the markets in U.K. and France?
Thank you very much, Noah, for that again. I'm a little bit concerned. The German portion of the portfolio, we stated to be in the range of 40 to 45, but we need to check whether there might be a bug in the presentation. So again, 40 to 45, more or less stable. To the other two markets, U.K. and France: France is clearly interesting-
Mm
and a market we are focused on. It is our second biggest portfolio, by the way, in Europe, after Germany, and it is a very liquid and sizable market on top of that. So France can be assumed to grow. Same for the U.K.. We have been, if I may say that, we have been after the referendum already, it was eight years ago, and Brexit, we have been very carefully in the U.K.. Meanwhile, I think we have a better ground to stand on, and currently, the U.K. is clearly one of the markets recovering at least earlier than some of the continental Europeans. So you might expect growing portfolio also in the U.K..
Thank you, Thomas. Two further questions from Borja Ramirez, Citigroup. Hi, Borja. So first question: thank you for your presentation. Could you please provide details on IRB approval process? What is the potential timing and capital impact, Kay?
So the new Basel rules, Borja, are going to become effective 1st of January 2025. As you are aware of, they are all approved. We work under the clear assumption that by then, yeah, we will switch to the foundation approach under the new regime. That process is currently running, but we are confident and therefore also planning to move to that, starting 1st of January.
Further question from Borja: Could you provide any details on second half LLPs? How do you see non-performing loans evolution going forward?
Borja, I think that is one, breaking a little bit the rules that Michael has set, yeah, that we don't want to talk about Q3 or the second half.
Mm.
But what I can reiterate what I said, yeah, without preempting our Q3 results and the development there, we remain on track for the targets that we set out and have committed to for 2024.
One further, at the moment, last question from Corinne Cunningham: "Can I just confirm on the AT1 coupon, have these been deducted in arriving at the 8% ROTE?" Marcus?
Yes.
Short answer. I think it was the last question. We now conclude the Q&A session. Thank you for your interest and participating. If you are interested in a further dialogue with us, please reach out to me or my team. Closing words would now be from Kay.
Thank you, Michael. And not to hold you longer in front of the screen, I would say in the name of the entire management board, a big, big thank you for participating in our today's Capital Markets Day. In particular, also for the engaging questions that you have presented to us. This strategy is a starting point in developing PBB until 2027. We are going to transform the foundation of our business, but we will remain, yeah, at our DNA, which is servicing commercial real estate clients. We are convinced that with this strategy, we will increase shareholder value for all of you, our investors, by consistently improving our return on tangible equity. And with that, we will also have an attractive distribution strategy. We mentioned today it will be dividends and share buybacks.
Whenever we spoke about share buybacks, don't forget, they will be subject to ECB approval. I think that's common understanding, but it's important to reiterate. I would like to say again, thanks very much for participating. We are looking forward to the dialogue with you. Marcus said it in his speech, "Dialogue is key." I repeat that because that's right. Looking forward to this dialogue, and thank you very much for joining us.