Debt funds still seeking their sweet spot

Real estate debt funds have so far failed to make a big splash in the German real estate market, according to Daniel Mair, senior associate at Ernst & Young in Germany.

‘There were a lot of announcements about the creation of debt funds from different parties, but in terms of activity they have still been subdued. The debt funds that have been raised are still looking for their sweet spot,’ Mair told PropertyEU's Investment Briefing in Frankfurt earlier this week

The need for new sources of debt remains, but existing players are also meeting that need, he continued. ‘There are a lot of equity players in the market who have changed their return expectations. The winning consortium that acquired the GBW residential portfolio was made up of a lot of parties who were each willing to finance a chunk of the equity. That makes it easier for the banks to provide the debt finance.’

Since the outbreak of the global financial crisis, a sizeable number of major international banks have retreated to their home markets or withdrawn from real estate financing altogether. Germany has not been spared in this process.

Eurohypo, not so long ago one of the most expansive property lenders in Europe, has been reined in by its parent Commerzbank and is now winding down its operations under its new name Hypothekenbank.

Westimmo, the real estate financing arm of troubled bank WestLB, is not providing any new finance until a sale of the business is finalised. On the other hand Deutsche Pfandbriefbank is in acquisition mode and raking in new business as its preens itself to be spun off as an independent entity or floated on the stock exchange by its parent Hypo Real Estate.

‘In Germany, it doesn’t make sense that so many classical banks are leaving this market and changing their strategy so quickly,’ Mair said. ‘We need a Wells Fargo or a Chinese bank to make a market here. Maybe if they do that, lenders who have said goodbye will come back. Germany’s safe haven status is here to stay and that will generate confidence. Maybe the traditional lenders will change their strategy and become alternatives to new sources again, not in the immediate future, but at a future date.’

Canadian and Australian banks are also entering the German market. Earlier this year Sydney-listed Macquarie Group acquired a package of 700 German residential mortgages with a face value of €90 mln from the Royal Bank of Scotland. Meanwhile Citibank has been spotted in the German market with a view to reviving CMBS, but it is doing lending as well, Mair said.

The influx of traditional foreign financers could have a bigger impact on the German banking sector than debt funds, he added. ‘I think German banks could be out for a long time, but I think they will come back in the long term. It depends also on the current management. But if foreign banks offer better terms, they could become well-established players in the German market.’