Germany’s new kid on the block builds on timely arrival

In the cohort of German specialist real estate banks that have been so vital to Europe’s property market in the past two years, DG Hyp is the new kid on the block. The bank has been around for many years as a residential mortgage lender (see below) but was completely re-invented five years ago as a commercial real estate lender, first in Germany and then overseas.

The Hamburg-based bank is not nearly as large as Eurohypo or Deutsche Pfandbriefbank in terms of book size or origination, but has grown into a successful medium sized lender from a standing start. The bank completed €4.2bn of new lending on European and US property last year. Its total commercial real estate book was worth more than €21bn by mid 2009.

To UK minds, the bank’s structure seems unusual: it is owned by more than 1,000 German co-operative banks and their customers, via DZ Bank, the ‘central bank’ for these ‘Volksbanken’. But its lending model is “very simple”, says Steffen Günther, head of international and secondary market business.

Günther, who joined from Landesbank Berlin/Berlin Hyp in 2008 to manage overseas expansion, says: “We are a balancesheet lender. Whatever we do, we take a longterm view for our balance sheet; we are not lending to repackage or sell back to someone else. We want to be a reliable, relationship bank for clients with a long-term view.”

DG Hyp’s domestic business has offices in six of Germany’s biggest cities but also works with the network of 13,000 co-op branches. For example, last year, the real estate bank and Dortmunder Volksbank led a consortium including two local savings banks to fund construction of the Neues Thier-Areal gallery shopping centre in Dortmund, for German developer ECE.

But DG Hyp is also fashioning its own stable of private and institutional property clients, first at home and increasingly abroad. Günther says German assets account for between two-thirds and three-quarters of the total property book, a proportion DG Hyp wishes to maintain. The rest is international business, developed after expansion of the bank’s franchise outside Germany began in 2006, when the bank opened a New York office. The London office opened in 2007.

Until this year, business with clients in other markets was managed by desks in the Hamburg HQ – and the Nordic business still is. But recently, DG Hyp opened a Paris office. So far the French team has just two staff, headed by Anne-Isabelle Carbonnières.

Günther hopes a fourth international office will open by April, in Warsaw, headed by Marek Buzek. The bank is just waiting for its banking licence to come through. “When we think about international markets, our first priority is to ask ‘where do our German clients want to target?’,” says Günther. “Then we look at markets from an economic standpoint and at the robustness of their legal system, especially whether they recognise mortgages as security collateral. Third is the growth story, which Poland has.” Poland completes this phase of expansion. “Now we want to consolidate in these four markets and excel there,” Günther adds.

The London office is run by Andrew Goodbody, formerly of Erste Bank. Last year his seven-strong team carried out £450m of new lending, making the UK DG Hyp’s largest international market, with a more than 40% share of the €1.1bn of overseas loans written last year and almost doubling the UK book to around £1bn.

In its first year in London, the bank participated in three or four loans, including Eurohypo’s facility for 3 Hardman Street at Spinningfields in Manchester (see news). Goodbody says: “Our timing could not have been better”, as by then only a few banks were left in the market and DG Hyp could take advantage of lending on re-priced prime property deals at higher margins. DG Hyp’s timing was not so lucky in the US. In its first couple of years it was lending at the top of the market, in mainly secondary market business in the capital markets.

Günther now spends a lot of time travelling to the US and Asia to manage some of these participations that have soured. The bank is still lending on US property – it issued €300m of loans there last year – but in less complex, first-mortgage lending, European-style structures.

Günther claims the bank is not volume driven, despite much talk at the MIPIM property conference this month that German banks are cutting prices to increase their market share. Günther says: “We are risk and quality driven. We want good assets and simple, conservative finance structures backed by strong sponsors, as that is the best guarantee to see the loan through its life. “We anticipate €300m – €400m of new UK business this year; if it’s €500m, that will be great. But quality is the thing.”

DG Hyp’s lending parameters are also influenced by the collateral rules of the pfandbrief market, which it uses to help fund its lending programme. It issued more than €3bn of the bonds last year. For funding, DG Hyp also has the back-up of DZ Bank and its huge retail business.

Prime deals shortage

The main barrier to faster expansion has been the low number of prime deals, but this doesn’t surprise or disappoint Günther. In fact, new European lending business rose 19% in 2009’s tough first half, compared with the first half of 2008, to €1.98bn. But he adds: “I expected more refinancing business, with banks pulling out of the market for whatever reason and borrowers looking for new banking partners.” With relatively small international origination teams, DG Hyp does not plan to take on Germany’s bigger property banks in chasing arrangement fees for assembling and managing large club deals.

Goodbody’s team has done one or two simple deals as agent, like the financing of 151 Buckingham Palace Road last year. But Günther adds: “Being the arranger is not a business we are keen on, as it requires a lot of resources and the extra responsibility is not always worthwhile.”

This year, Goodbody believes competition from other lenders will increase in the UK. He does not think loan-to-value covenants will rise, but agrees that banks’ margins on deals are already under pressure as a result. “At the start of the year I thought margins may fall to 150 basis points (from 200-220bps),” he says. “We haven’t seen signs of that yet, but they are slowly falling.”

Günther maintains this is not a big issue and says that in Germany, margins are generally lower anyway. “You don’t win the battle on price; you win or lose on the risk front,” he adds. As the lending field gets more crowded, DG Hyp hopes that its track record as a reliable bank that makes quick decisions and executes deals fast will pay off.

Commercial move separated bank from resi roots

DG Hyp’s full name, Deutsche Genossenschaft Hypotheken, means German co-operative mortgage bank. But  it has been running down its residential mortgages book since 2005/2006 and shifting to commercial mortgage lending.

“The residential business was no longer commercially viable in the long run as we were becoming a competitor to our owners,” says Steffen Günther, head of international business, referring to the 1,200 German co-operative banks that own DG Hyp.

The retail mortgage business is more local, people-intensive and lower margin and the restructuring has enabled the bank to slash costs and focus on being a specialist at a higher-margin business.

As well as commercial real estate lending, DG Hyp works in public finance, financing these businesses through the pfandbrief covered bond market. Its total balance sheet at 30 June 2009 stood at almost €70bn.

In that first half, the bank made a €100.7m gross profit, up from €84.7m in the first six  months of 2008. The bank’s net profits were flat, although writedowns on mortgage-backed securities were reduced to €40bn.

The bank is an entirely separate profit centre within DZ Bank, which no longer offers commercial property finance itself.

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