DG Hyp to pull out of international markets

German lender DG Hyp, which is part of the DZ BANK Group, is to withdraw from international markets as part of a drive to focus on operations at home, a DG Hyp spokesman told PropertyEU.

While the German lender will continue to support its German clients by financing their commercial real estate projects in selected international markets, it will close its international offices in New York, London, Paris and Warsaw within the next year.

'The decision to concentrate DG Hyp's business activities on the German market, and to intensify our co-operation with cooperative banks, also reflects the regulatory requirements under the future Basel III regime. With this step, we will harness our strengths, to ensure that the bank's reserves are put to optimum use,' said Dr. Georg Reutter, chairman of DG Hyp's management board, in a statement.

The move will surprise many in the industry because DG Hyp has been one of the most active property lenders in the UK. In a report published by Savills in October, DG Hyp was cited as one of the Top 12 'most active bigger ticket lenders' in the UK. Of the Top 12 lenders mentioned in Savills' report, nine were German lenders, including Deutsche Bank, Eurohypo, BayernLB and West Immo.

DG Hyp has been involved in several big deals this year, including the refinancing of 5 Canada Square in London. Nevertheless, the incoming Basel III banking regulations mean that banks will have to hold more capital on their books, which makes property lending less profitable and is also expected to put a dampener on new lending. As such, the German lender’s withdrawal from the UK market could be the first of many.

'A number of German banks are reviewing their activities. Germany is over banked and they're going through two natural processes at the moment: mergers and having to face capital adequacy issues relating to Basel III,' said William Newsom, UK head of valuations at Savills. 'German banks are cautious and UK property values have proven to be quite volatile, so there may be other German banks withdrawing from UK property lending,'he added.

And as the reasons for pulling out of the UK - including the liquidity requirements of Basel III - are not unique to DG Hyp, other lenders may follow suite, Ed Stansfield, head of UK commercial property and housing market research at London-based consultancy Capital Economics, told PropertyEU: 'These reasons will have an impact on other lenders, who may pull horns and return to their domestic markets. Active lenders will be under greater pressure and this puts a squeeze on the market,' he said.

Many lenders have scaled back on international lending in the past two years as the financial crisis deepened. The question now is whether other German lenders are likely to follow suite in the UK. Deutsche Bank declined to comment. For Deka Bank, the UK will remain its most important market in Europe, Deka's head of real estate lending, Anni Hönicke, told PropertyEU. 'Half of our European business is in the UK and we plan to remain just as active there,' she said.

Both the UK commercial property market and housing market have slowed down in recent months, with mortgage loans remaining flat amid growing concerns that the UK could be heading for a ‘double dip’ recession. Net new lending is negative in the UK and Capital Economics is predicting that net lending flows will be negative ‘for some time to come’. In the commercial property sector, net lending flows in October were minus GBP0.8bn. As a share of total outstanding loan books, commercial property debt fell from 11.2% at the end of Q3 to 10.9% in October, the first time it has been below 11% since the first quarter of 2007.

DG Hyp, which is also one of Germany's largest issuers of Pfandbriefe, or asset-covered bonds, was also one of several banks to terminate its relationship with Fitch Ratings last month. Its loan portfolio as of 30th June 2010 totalled EUR 21.6 bn.