The bank’s future is uncertain, but its head of real estate says it will “come back into the market” this year and can play a part in helping create a sustainable financial system. Jane Roberts reports
Pbb Deutsche Pfandbriefbank, the good part of Germany’s nationalised Hypo Real Estate, has been telling property clients and other banks that it will ramp up lending this year. The bullish talk follows the restructuring of HRE in last year’s final quarter. Once Germany’s biggest property bank, HRE was brought to its knees by the financial crisis of 2008 and taken over by the government in 2009. Late last year, €173bn of toxic and non-strategic assets – more than half its balance sheet – were placed in ‘bad bank’ FMS Wertmanagement.
FMS is guaranteed by the government and will be wound down over the next 10 years. HRE’s next stage will be to make the ‘good’ rump a profitable business ready for privatisation as soon as possible. Since the start of last year, Dr Bernhard Scholz has been the member of the board of management with responsibility for real estate and public sector finance. He says Deutsche Pfandbriefbank will lend “considerably more” this year than last.
In 2009, the bank lent around €3bn on real estate and the 2010 figure is thought to be similar, and to include more new lending that year. To put those figures into context, €3bn a year is less than half the bank was lending at the market’s peak. In the first half of 2008, for example, it lent €5.7bn. Like most of the other German banks in real estate, Deutsche Pfandbriefbank’s focus is on pfandbrief-eligible loans. As well as Germany, this includes the bank’s core international markets: France, the UK, the Nordic countries, Poland, Czech Republic and to a lesser extent, Spain.
Tilting the balance to Germany
This year around half of the bank’s property lending will be domestic and half international. Scholz infers that this will tilt the balance back towards the domestic market. Last year the percentage of international business, which normally offers higher margins, was higher. But Germany is the bank’s home and is a less volatile market.
HRE’s importance as a pfandbrief issuer was partly what saved it, as the Munich-based bank was considered systemically relevant. But not everyone takes this view, or believes the restructuring and sale is viable. Last year, EU competition commissioner Joaquim Almunia said he had doubts about HRE’s long-term viability. Then, last month, a government-commissioned report, led by Bonn University’s professor Daniel Zimmer, started rival bankers’ tongues wagging when it said Deutsche Pfandbrief-bank may face “weak margins and strong competition” and a sale would not generate higher proceeds than a complete wind down.
But Scholz insists the bank and its liquidity are needed: “Of course there is competition, but much less than compared to before the crisis. However, there is also strong demand. We will only write business with the appropriate risk profile which includes sufficient margins.” He adds: “The remaining bank is much more valuable as a going concern. We are very sure we can provide long-term financing and add value to the market: this bank will stay around.
“We have already created the wind-down environment for the non-strategic part of the portfolio that they wanted. The government has said that it doesn’t follow all the report’s recommendations and we feel we have the [government’s] support.” Another problem is recruiting and retaining staff when the bank is barred from paying bonuses; as a board member, Scholz’s pay is limited to €500,000.
“Recruitment is a challenge because we cannot have any variable component in our pay structures,” Scholz says. “But not everything is about pay; the other motivation is that we are a bank that wants to do deals and are growing again. That provides an opportunity for people, including young people, to be involved in from the start.” In any case, he doesn’t believe “the bonuses paid in parts of the industry in the past were the right way to incentivise people”.
The person grappling with the practical effects on the international side is Harin Thaker, Deutsche Pfandbriefbank’s head of real estate finance international. Thaker has been a stable force at the bank since 1992 and is credited with holding together most of his team in tough times. It would be ironic if he lost experienced staff now because of the pay clampdown, when the bank could be on the front foot again.
Late last year one of his most experienced UK originators, Richard Bentley, left to head the London office of rival bank Helaba, while Jairaj Amin, the former MD of international property syndication, left last May to work for one of the bank’s clients, Romanian entrepreneur Dinu Patriciu. Thaker is mid-way through recruiting 10 staff in London and Paris, in origination and underwriting, plus analysts (see below).
Deutsche Pfandbriefbank has recently financed some large deals, particularly in Germany. This month it provided the larger share of €224m used to refinance Munich’s multi-let, 82,600m2 HighLight Towers, along with HypoVereinsbank. Last month, it was one of six banks that refinanced German housing company GSW in a series of bilateral loans secured on different parts of the portfolio. Deutsche Pfandbriefbank provided a 10-year term,
New real estate finance strategy
Scholz says the Munich commercial deal “shows the bank’s new real estate finance strategy. We are concentrating on pfandbrief- eligible core markets in Europe, with a focus on Germany. Moreover, pbb is available for its customers as a financier for large-volume deals, which we can provide with partners or syndicates, as necessary.”
More than ever the bank must balance lower loan-to-value, core-type deals that offer lower margins but can go into the pfand-brief pools, with the funding cost to the bank of the opportunity to earn better returns from more complicated deals. Funding these latter loans, or their top slices, is a challenge. “Senior, unsecured funding above pfandbrief LTV ratios is a scarce and expensive resource,” Scholz says.
As a covered bond product, and unlike other forms of distribution, pfandbrief funding still ties up equity. “It requires banks to say goodbye to some former expectations regarding return on equity, so you can’t consistently get 15-18%,” he points out. For this reason he doesn’t see a large UK covered bond market for commercial lending becoming established.
“The Anglo Saxon way to do finance isn’t oriented towards covered bonds, as it is on the continent,” Scholz says. “It comes down to what is acceptable to equity investors in the banks. An 8-10% stable return on equity (which is what pfandbrief funding delivers), might not be enough.”
GSW’s refinancing has been a fillip for the market because the old loan was a CMBS deal, and around €11bn of securitisations are due for refinancing in the German residential market alone. Until the ‘new’ bank has a longer track record, it remains to be seen how special that deal was. “Refinancing CMBS will be a large part of our lending for the next few years, but on a deal-by-deal basis,” Scholz says.
“We strongly believe the syndication market will be back,” he adds, partly because insurers are expected to show more interest in buying loans, “which may be very helpful in making the market more liquid”. Meanwhile, “there is still a debt crisis and we have to recreate a sustainable, stable financial system that adds value”.
If it is up to the board, pbb will remain a European bank. Unlike HSH Nordbank or DG Hyp, it is not about to withdraw from international lending and from London. “I am quite market-oriented,” Scholz says. “In the end, the market will determine if we are needed. But I am convinced there is a need for pfandbrief banks.”
Team building exercise will help tap market opening
Harin Thaker, Deutsche Pfandbriefbank’s international head of real estate finance, has recruited three originators and two analysts in key markets this year. Matthew Clark and Madeleine Forrest are due to join the London origination team. The bank has confirmed that Clark, former Lloyds Banking Group head of quoted real estate companies, institutions and major corporates, will be a director originating UK and European deals with MD Michael Kenney. Forrest is rumoured to be joining from WestImmo.
In Paris, Philippe Duvergne has joined from Royal Bank of Scotland to work with MD Renaud Jezequel on French and cross-border origination and structuring. The two new analysts are Matthew Stansfield and Eliza Klasinka. Stansfield has 11 years’ French property experience and will be responsible for analysing all property aspects of the French, Benelux and Swiss markets. Klasinka will work in London.
Thaker has the green light to make up to five more appointments. “We are looking for key originators,” he says. This may include another in London and underwriters in London, Paris and Madrid, plus a further property analyst in Paris. “The market is opening up,” Thaker says. “We don’t know how much will be bought by cash buyers who don’t need gearing, but private equity houses are waiting for more distress and we need to be ready.”