DekaBank’s real estate boss Anni Hönicke tells Daniel Cunningham why the German bank will continue to target large, prime deals, despite Brexit, European elections and Donald Trump.
It is the day after UK prime minister Theresa May revealed the country’s Brexit plan and German real estate banker Anni Hönicke is visiting London.
The revelation that the UK will leave the European single market could understandably spook a foreign banker whose business is partially built on lending into the UK. But if Hönicke, global head of real estate at Frankfurt-based DekaBank, is worried, she isn’t showing it. “The big shock was last June with the leave vote,” she says. “That was the surprise paradigm shift, not yesterday’s speech.”
Even before the referendum, Hönicke insists, her view on UK lending was fixed. “We decided that whatever happens we will not change our relationship with the UK market. It is such a transparent market, it’s so professional and there is such a deep investor community. It has so many positive features. All that aside, the market needs transactions, and we really believe that there will not be such a big impact.”
Speaking to Real Estate Capital with Hönicke is Mark Titcomb, head of DekaBank’s UK representative office. There will be a few extra obstacles for an EU bank lending into post-Brexit Britain, Titcomb admits. Financial ‘passporting’, he says, is a relatively recent phenomenon, and lenders like DekaBank would adapt if those rights were lost. “Don’t forget,” he says, noting the bank’s US and Japanese operations, “DekaBank is a lender in various places outside the EU already. So things will be different, but not necessarily new to us.
“As a euro-source lender we’ll have to be careful in the lead up to Brexit as there could be extra volatility in the cross-currency swap market. Whilst this has the potential to raise our cost of funds, we still remain confident about our relative competition position.”
“Before the Brexit result, the UK was a perfect market for us,” Hönicke adds, “and now the people have decided not to be part of the EU, it is just in line with many other big markets.”
After 10 years of doing business in the UK, DekaBank has applied for its London outpost to be upgraded from a representative office to a branch. The paperwork is being processed with German banking regulator BaFin, which also needs to be approved by the UK’s Financial Services Authority.
“We’ve done more than 40 transactions since we set up here and we have been arranger or co-arranger on each,” Titcomb says.
Most recently, in January, DekaBank provided a £158.4 million (€184 million) loan secured by the London Stock Exchange headquarters at King Edward Court, close to St Paul’s Cathedral, following Madison International Realty’s purchase of a half-stake from Oxford Properties.
It is the type of core deal which DekaBank likes, but Titcomb insists that even if there is a correction in the market, the bank will continue to seek out core deals as it likes to lend through the cycle, adjusting terms accordingly.
“Obviously we would have to be much more careful during the transitional period in which values were falling. For instance, after the financial crash Deka had relatively good liquidity, we had money to lend the risk/reward balance was attractive, but not many lending opportunities met our criteria. That’s the beauty of our lending platform. We don’t have too many people in specific locations, so Anni can pull the lever and shift more resources to America if appropriate, or to Paris.”
The guiding principle of DekaBank’s business is that it lends on a conservative basis to core properties. “When we launched our real estate lending business in 2007 we came to the conclusion that we wanted to be a relevant player in the most liquid and most important real estate markets in the world,” says Hönicke.
“We want to be conservative and that means senior lending. When we started out, it was the height of the market and we could see how things could easily go wrong. Everybody by that time was already fed up with complicated structures and capital stacks. It sounds tempting to achieve higher profits by going into mezzanine lending, but that’s not our mission.”
In 2007, unencumbered by existing lender relationships, Hönicke’s fledgling property lending team at DekaBank was able to take a blank slate approach to its strategy. “We did not have any obligations because we started from scratch,” she explains. “We had zero exposure to Germany and it stayed like that for a long time.”
From the start, higher-margin markets than Germany were in DekaBank’s sights. The UK was an early target, even if the timing of the opening of the London representative office was unfortunate; coinciding with Lehman Brothers filing for bankruptcy. Titcomb, who, like Hönicke, also came from Eurohypo, has led the London operation since then.
Hönicke knows a thing or two about property lending in Europe. Her banking career began in the early 1980s in the credit department of a southern German savings bank where she “learned the craft” of lending, according to her blog.
She relocated to Frankfurt in 1987 where she spent the next 15 years at Commerzbank subsidiary Rheinhyp. It was there that she undertook the bank’s first overseas lending. After the formation of Eurohypo in 2002 she spent five years as head of corporate banking, before joining DekaBank in 2007.
Hönicke’s strategy for DekaBank is to target a handful of prime markets – Germany, the UK, France, Italy, the US and Japan – and write prime deals. DekaBank focuses on big cities for offices and well-located prime retail and logistics. Core, income-producing properties are favoured, although some element of asset management is considered to spice up the portfolio. Leverage rarely strays beyond 65 percent loan-to-value. Large underwrites are possible, with loans subsequently syndicated to German
Landmark deals in the last 12 months have included a €200 million financing with Helaba of Samsung SRA’s Tour So Ouest purchase in Paris, last July.
Last August, DekaBank teamed up with ING for a €144 million joint underwrite to finance the acquisition by a Middle Eastern investor of One Spencer Dock, a prime office building in Dublin. DekaBank provided €88 million of the loan.
The real estate lending team is guided to an extent by the equity investments which Deka Group’s real estate funds make, although the debt team takes on slightly more risk. “Core alone would not be enough if we just mirrored what our funds are doing then the loan book would be much too dry” explains Hönicke. “So we consider portfolio deals, for example.”
Offices have traditionally been DekaBank’s most financed sector. “It’s the most liquid asset type and it’s the easiest to understand. But we are trying very hard to have more exposure to retail, logistics and hotels. We like to follow our customers and they like logistics.”
Last December, DekaBank underwrote a €131.6 million portfolio financing for Gramercy Property Europe in Germany. The 391,000-square-metre portfolio consists of eight logistics properties located around Germany. Although many of the longer-established German real estate banks are focusing their efforts outside their ultra-competitive and tightly-priced home market, DekaBank is actively aiming to grow its German book.
“In 2007 we stayed away from Germany as much as possible, as it didn’t offer acceptable margins. However, we are trying to gain more exposure. Germany was very much the darling of international investors last year and there are conservative investors going into the market seeking very low leverage. Those investors like the same type of deals that we like to lend on,” Hönicke says. “There is a value to doing business in our home market; we have the local knowledge. But we are really concentrating on the international investors which we bank in other countries and which we want to accompany in Germany.”
Talk drifts back to politics, and the prospects for the EU and European property markets. “The upcoming elections in the Netherlands, France and Germany will be another challenge for the EU. I do not foresee any remarkable impact on the state of the core European real estate investment markets as a result of those elections.
“The lending markets will remain very liquid over the next one or two years with interest rates still remaining low. Even though cross-border lending will not be affected by the situation in Europe margins, which have bottomed out, will
go up in individual markets as a reaction of the lenders when a country produces bad news which in turn creates uncertainty.”
The Trump effect
The discussion turns to Donald Trump, who at the time was two days away from being inaugurated as the US president. Hönicke admits that she does not share the doomsday predictions of many on the likely effects of the Trump presidency on Europe.
“I’m sure that because of Trump there will be a shift from monetary policy to fiscal policy. It starts in the US and nobody knows how quickly this will have an impact on Europe. The ECB and the Bank of England will like the idea of a change and will be able to slowly give up their unconventional monetary policy of recent years.
“I think there will be inflation in the US, higher interest rates, but there will be higher growth and consumer spending and corporate profits in the US will go up. There could actually be many good effects. There could be a positive, or at least neutral, effect on real estate investment worldwide.”
Insisting that she is a “glass half full” person, Hönicke says she feels positive for 2017, despite the market backdrop. Last year, her team originated around €3.8 billion, down from what she describes as an “extraordinary” €4.4 billion in 2015. Over the next two to three years, Hönicke wants to grow the European real estate lending book from €7 billion to €9 billion. But doing so, while sticking to the bank’s conservative lending criteria, will be a challenge.
“Our hit rate in the UK is deteriorating due to increased competition,” says Titcomb. “It used to be one in every three deals we looked at we would end up financing. Now it’s more like one in 10.”
After jokingly berating Titcomb for his “glass half empty” statement, Hönicke agrees with the sentiment that DekaBank, will have to work harder and do more legwork to win the deals it wants on the terms it is determined to stick to.
“You have to kiss more frogs,” she says. “We maybe have to look at doing smaller lot sizes, starting at €20 million, do more portfolios, maybe more management-intensive deals if our gut feeling tells us it’s a good deal. Maybe we will syndicate a bit less.”
Determined to stay positive, Hönicke adds that a huge volume of capital remains focused on European real estate, with a more diverse investor base than ever eager to put money into the sector.
“There are so many new vehicles out there, parties teaming up who you would never have thought of, such as sovereign wealth funds and fund managers,”
says Hönicke. “Every morning, somebody wakes up and thinks, ‘Real estate is a
DekaBank in brief
DekaBank is the central asset manager of the German Savings Banks Finance Group, one of the largest banking groups of the world. The financing business division of DekaBank handles credit business for its client, such as financing transport schemes, infrastructure and real estate.
Along with its real estate business, which is an active equity investor in 26 markets globally, it forms with other subsidiaries the Deka Group. The real estate lending division has offices in Germany, the UK, France and Italy, as well as the US and Japan.
“The savings banks keep their money with us, so we have enormous liquidity of funds and we also have capital with maturities which complement our lending, so we can swap it at good rates,” says Hönicke.
DekaBank lends on office, hotels, logistics and retail in lot sizes starting from €20 million up to €300 million, with a €70 million sweet spot. Income producing assets are favoured and ideally, but not essentially, properties will be core. “We like some quirks, if there is something we can do with the asset management,” Hönicke says.