EU approves bail-out and new business model for Germany’s Hypo Real Estate

The EU Commission has approved the €150bn state aid given to Hypo Real Estate during the financial crisis. The clearance given on 18 July means the Commission has also endorsed the new business model for the bank. This involves shrinking its balance sheet and focusing on real estate finance and public investment finance, carried out through Deutsche Pfandbrief-bank and funded through the pfandbrief market.

However, the EU still wants the bank to be re-privatised “in the medium term”. The bank will no longer be a full-service public finance lender, cutting out public budget financing lending, which is the equivalent of unsecured lending to regional or local government. It will seek to replace this business over time with higher margin real estate and public infrastructure lending.

The bank’s chief financial officer Alexander von Uslar said: “After the EU’s confirmation we can again concentrate on the market.” Hypo closed 26 offices during the crisis and will not re-open any outside Europe, but has been given the go-ahead to open three more in Germany, in Hamburg, Berlin and Rhine-Ruhr, plus one in Stockholm.

It will continue to lend on property in core countries where it has offices: Germany, the UK, France, Spain, Scandinavia (from Stockholm), and in Belgium, the Netherlands, Switzerland and central Europe. The bank is not allowed to lend on property in Portugal, Italy or Ireland. Its new business target for 2011 is €8bn, rising to €10bn in 2013. More than 80% is expected to be real estate business.