Deutsche Hypo is aiming to establish itself among the leading German mortgage banks by sticking to its core markets. Daniel Cunningham discusses its strategy with head of origination Thomas Staats.
For more than 25 years, Deutsche Hypothekenbank (Deutsche Hypo) has been sourcing deals from outside its national borders.
One of the first German mortgage banks to open an office outside Germany, Deutsche Hypo set up shop in Amsterdam in 1990 in order to tap its neighbouring market. Amendments to Germany’s Mortgage Bank Act in the late 1980s had made foreign loans possible and Deutsche Hypo seized the opportunity.
Lending outside Germany began in early 1989, explains Thomas Staats, the bank’s head of origination, international property finance. Back then, the Berlin Wall still divided east from west and a raft of banks competed for a slice of a smaller domestic market than today. “Re-unification was not in the business plan,” Staats jokes.
“In 1989 the German market was 60 million people. If you wanted to grow you had to go somewhere else. So the next country to Germany was the Netherlands. For diversification of risk, you could see German money going out of Germany.”
Today, Deutsche Hypo is active across five core countries: Germany, the Netherlands, the UK, France and, most recently, Poland. Growth is targeted across these core markets. The aim, Staats explains, is to be counted among the top three German real estate lenders. It is an goal which pitches the bank against domestic rivals such as Deutsche Pfandbriefbank, Aareal and Helaba; all uber-competitive at home and active abroad.
During 2015, Deutsche Hypo lent €3.7 billion, slightly up on 2014’s €3.6 billion. The bank would be pleased to exceed it in 2016, Staats adds. “We have a long-term five-year view and we are slightly above target,” he explains. “We want to be in the top three. That’s always our aim. We will stick to the strategy we have; core, core-plus and also some development and hotels.”
The aim is not simply to match rivals’ new lending volumes. Indeed, some domestic competitors lend more than €9 billion annually. Rather, Deutsche Hypo counts factors including client satisfaction, reputation and the size of its loan book as important measures. “It is Deutsche Hypo’s ambition to always be approached first by its target clients when they need finance,” Staats says.
As at last September, Deutsche Hypo’s European loan book stood at €12.6 billion and the aim is to grow it. Rival mortgage bank Aareal had a €27 billion loan book by last summer, while Helaba and Deutsche Pfandbriefbank’s loan books stood at €28.1 billion and €25.1 billion last September, respectively.
Deutsche Hypo’s loan sizes vary from between €20 million to €300 million, for senior, whole loan and development facilities. Loan-to-value (LTV) across its deals also varies, but is typically up to 85 percent for whole loans in Germany and up to 70 percent for international deals.
The intention is to achieve two-thirds of business within Germany and a third within its other four targeted European jurisdictions. Germany remains an intensely competitive lending environment, with cheaply-funded banks able to price debt at as low as 80 basis points.
“Germany is a difficult market in which to achieve growth because of the competition,” Staats admits, “however, the investment market was €55 billion in 2015, so you only need a share of that to do well. The same applies to the UK and France.
“The Netherlands was €12 billion last year and Poland was €4.4 billion. We can achieve growth in markets with liquidity and where there is critical mass. To a smaller degree we can also do deals outside our core markets where we accompany existing clients.”
Last year’s marquee deal was a €331 million underwriting of German client Patrizia’s €578 million acquisition of the Project Wilhelmina portfolio of 137 apartment blocks in the Netherlands. Deutsche Hypo retained a third of the deal, which was also syndicated to ING Real Estate Finance and Deutsche Pfandbriefbank.
In the UK, Deutsche Hypo was one of five banks which refinanced Value Retail’s Bicester Village with a £425 million loan in late 2015. This February, it provided £53 million to support Ashby Capital’s purchase of a retail park in Wales, a loan understood to be priced in the region of 160-170 basis points.
While some banks, particularly investment banks, have proven keen to finance deals in the Southern European markets, Deutsche Hypo is content to keep its foreign lending to within its chosen core locations. “In Spain, we are servicing the existing portfolio. It remains a very interesting market,” says Staats.
Market opinion suggests that capital is flowing into core Europe markets as a result of wider volatility. It is a view to which Staats subscribes: “Given more volatile times, increasing political risk and threats from terrorism, ‘Old Europe’ is obviously seen as a safe haven. To get money into another country is easy, to get it out looks more difficult. That’s obviously not seen as a problem in the Old World.”
An eye on the east
While Deutsche Hypo tends to look west for foreign business, it does have one eye on the east. Its Warsaw office was opened in 2014, and Staats counts Poland among the stable markets in which Deutsche Hypo operates.
“Initial growth was based on opportunistic value-add investors. We are now past that phase. Institutional and long-term money has come into the market. We are trying to establish a long-term operation there to build a proper sound loan book. It is a place where we as a very conservative German bank can fit in.”
The focus is to finance retail and office buildings in major Polish cities. In late 2014, for example, the bank financed the Norman Foster-designed Metropolitan office scheme in central Warsaw for Deutsche Asset & Wealth Management with a €133.4 million loan.
However, the emergence of the country’s new ultra-conservative government and tensions between it and the European Union (EU) are a concern, he adds: “We see Poland as a growing market, dominating the CEE Area. Nevertheless, we observe the current political developments in Poland closely.”
Further afield, lending in CEE and Turkey is not on the agenda: “Currency is a consideration, as we are funded in euros so we would have to add hedging costs. In some countries, a handful of banks dominate and that does not enable newcomers to offer competitive pricing. Simply opening an office in a new market and not earning money is not possible.”
Like its domestic competitors, Deutsche Hypo is able to compete effectively on pricing as a result of its low cost of funding. In February, the bank issued its first benchmark pfandbrief of the year with a €500 million issue. The seven-year bond carries a coupon of just 0.25 percent.
“There is lots of trust and liquidity in that instrument,” says Staats. “The refi basis for us is a pretty cheap one so we can pass that to the customer.”
However, Staats argues that competitive margins alone do not guarantee success: “Our selling point is to combine competitive, long-term funding with local knowledge of different market standards. For example, we financed a residential portfolio last year for a Dutch family trust with a €100 million, 20-year fixed rate loan. The customer was able to profit from this historic low-cost interest rate environment, get a Dutch contract in the Dutch language and benefit from speaking to the client relationship guys from Amsterdam.”
Stick to the Policy
Staats is adamant that real estate bankers need to remember the lessons of the last cycle and tailor deal terms to each unique transaction. “Lending on a sensible basis is something that everyone in the banking industry pretends to do,” he jokes. “We focus on excellent property quality and also LTV and cash flow. You can’t finance a 2 percent yielding property with an 80 percent LTV. You also need to have a lending policy for each asset class. It needs to be written down and stuck to.”
Development finance is an increasing part of Deutsche Hypo’s offering. Deals have been done in London, as well as regional UK cities including Manchester and Leeds. Last February, the bank provided a €70 million development facility to finance the revamp of Frankfurt’s 18,000 square metre Kaisergalerie as retail and offices.
“In Germany, nearly half of our business is development finance. That’s our home market. We have the knowledge and have maintained relationships for years. Also London because for more than 20 years we have had a team on the ground.”
Taking a pan-European view, Staats admits that there are challenges ahead. A raft of political issues will have an impact on the real estate market, he argues. The run-up to the 2017 federal elections in Germany will weigh on people’s minds, Staats suggests, as will the European response to the Syrian migrant crisis. Another key issue is the UK referendum on membership of the European Union this June.
“Generally, people are really cautious of the political issues in Europe. The political environment may shape the real estate industry in Europe,” Staats says.
Other challenges for the real estate banking sector include the pace of technological change in the financial industry, so called ‘fin-tech’. “The cost basis of technology is an issue,” says Staats. “The development costs of banking apps and other technology will mean a massive amount of IT needs to be put in. The banks need to put more investment into IT.”
Further capital requirements regulation remains a concern, Staats adds. Regulators are revising the Basel III capital rules set out for banks in the wake of the global financial crisis, in a revamp that some bankers have dubbed ‘Basel IV’. Bank of England governor and European Financial Stability Board chairman Mark Carney recently sought to quell talk of a seismic change to existing regulation, stating that there is “no Basel IV”, but many in the sector remain sceptical.
“It is important to stay in a positive mood to withstand the increasing burden caused by banking supervision and regulation,” Staats says. “We’ll all need more capital to cover it.”
Ultimately, the low-priced finance that has been widely available to borrowers will become unsustainable for lenders, Staats believes: “I think the trend is that the customer will have to be prepared for higher financing costs, not today or tomorrow, but in the long-term.”
Deutsche Hypo’s recent key deals:
• February 2016: £53 million at 60 percent LTV to Ashby Capital to finance the acquisition of the Morfa Retail Park in Swansea, Wales.
• December 2015: Took a participation in a £425 million five-year refinancing of Value Retail’s Bicester Village outlet scheme in Oxfordshire alongside Deutsche Pfandbriefbank, Santander, Credit Agricole CIB and RBS.
• December 2015: Alongside Hypo Vereinsbank, Deutsche Hypo financed the five-star Sofitel Munich Bayerpost hotel with a €76.5 million loan for Deka Immobilien Europa.
• July 2015: Provided a €188 million loan to subsidiaries of Invesco Real Estate to finance the purchase of four German properties known as the Büro Portfolio.
• May 2015: €35 million to finance the refurbishment of Berlin’s Hotel Zoo for RH Immobilien.
• February 2015: Financed the redevelopment of the 18,000 square metre Kaisergalerie retail and office building in Hamburg for Quantum Immobilien AG and Alstria Office REIT-AG with a €70 million loan.
• February 2015: As part of a consortium with ING Real Estate Finance and Deutsche Pfandbriefbank, provided €331 million to finance the acquisition of 137 residential properties in the Netherlands by Patrizia Group, Project Wilhelmina.
• January 2015: Financed Amsterdam DVM Group’s purchase of the Waldorf Astoria Hotel in Amsterdam.
• January 2015: Lent €88 million to BNP Paribas REIM for the purchase of 41,000 square metres Art Deco Palais office building in Munich.
• October 2014: Financed the purchase by Deutsche Asset & Wealth Management of the 38,000 square metre Metropolitan office and retail building in Warsaw with a €133.4 million loan.
• August 2014: Led a financing, alongside BVK and BNP Paribas REIM Germany, of the 80,000 square metre Mall of Berlin for High Grain House Investments and Arab Investments. The ten-year financing totalled €600 million, of which Deutsche Hypo held €80 million.
A brief history of Deutsche Hypo
• Founded in 1872 by Berlin-based merchants.
• Relocated to its current home city of Hanover in 1953.
• During the 1980s moved away from retail banking to concentrate on commercial customers and large clients.
• Amsterdam office opened in 1990. London and Paris offices followed in 1994.In 1999 ING Group took over Deutsche Hypo’s main shareholder, BHF Bank. In
• In 1999 ING Group took over Deutsche Hypo’s main shareholder, BHF Bank. In
• 2006, ING ceded its majority shares to Deutsche Hypo. Since then, the shares have been held by a syndicate consisting of four major shareholders.In 2008, following a voluntary, public takeover bid, Deutsche Hypo became a subsidiary of Nord/LB.
• In 2008, following a voluntary, public takeover bid, Deutsche Hypo became a subsidiary of Nord/LB.
• Since 2008, Deutsche Hypo’s staff has increased from 200 to almost 400 based in Hanover, Frankfurt, Munich and Hamburg, as well as the foreign offices.
• Warsaw office opened in 2014.