Germany’s Aareal increases focus on US lending

German bank Aareal has increased its focus on US real estate lending, with around 40 percent of newly-originated loans so far this year written in the market.

The bank’s structured property finance division is aiming to capture more business in the US in order to benefit from higher margins than those found in its home market.

In its Q2 2016 update this morning (11 August), Aareal announced a total of €3.5 billion of overall new lending from the unit during the second quarter of the year, almost four times Q1’s total of €900 million. Q2’s total included €2.4 billion of newly-originated loans, with the remainder comprising extensions to existing facilities.

Despite the increased push into the US, the majority of the overall €3.5 billion lending in Q2 was focussed on Europe. In total, Europe accounted for 76 percent of volume – including 18 percent in Germany – on the back of large portfolio financings. In June, for instance, the bank provided €368 million to Belgian firm VGP NV and Allianz Real Estate to finance a German logistics portfolio.

The US market accounted for around 20 percent of overall lending in the second quarter. During Q1, 54.6 percent of new business was done in the US during what was a more cautious quarter for the bank.

Aareal said that the Q2 performance was achieved despite factors creating uncertainty in the market and “persistently intense competition”.

The bank is sticking to its new business target of between €7 billion and €8 billion of real estate lending for the 2016 financial year.

The structured property financing segment generated operating profit of €128 million during the second quarter, down from €236 million in the same quarter last year, although that figure included €150 million of negative goodwill from Aareal’s acquisition of WestImmo.

Overall, Aareal reported consolidated operating profit of €120 million for the period between April and June, up 52 percent from the previous year, adjusted for the WestImmo acquisition.

The bank’s key source of income – net interest income – fell short of the total generated in the same period last year; €177 million, compared to €191 million. Aareal said that this was expected and was due to the ongoing reduction of non-strategic portfolios and lower year-on-year effects of early repayments.

Allowance for credit losses was €29 million, with an expected €80 million to €120 million for the full financial year.

Aareal added that it expects to generate consolidated operating profit of between €300 million and €330 million during 2016.

“Aareal Bank expects global economic growth to remain subdued for the remainder of the 2016 financial year, with economic momentum likely to remain significantly differentiated in regional terms. Given a variety of uncertainty factors and burdens, economic trends will remain susceptible to disruptions. In addition, uncertainty remains regarding the final specifications of various regulatory initiatives, which also have potentially significant implications for the property finance business,” the bank said.