Dresdner takeover could spell bad news for Frankfurt's office market

Commerzbank's acquisition earlier this month of rival Dresdner Bank from insurer Allianz for EUR 9.8 bn will not only shake up Germany's financial landscape but could also cast a shadow over Frankfurt's office market.

Allianz is selling the bank in two tranches to create a stronger German number two behind Deutsche Bank. Under the terms of the deal, around 9,000 jobs will axed worldwide, of which around 6,500 are likely to be in Germany. Commerzbank is hoping to make EUR 5 bn in cost savings by 2012, including the job cuts. Around 70% of the job losses are expected to occur in back-office functions and investment banking, with around 10% of cuts taking place in retail banking.

Massive redundancies could spell bad news for Frankfurt's office market, where around 15,000 Commerzbank and Dresdner staff are currently located. Take-up in the city started to slow in the second quarter, as the global credit crunch deepened. Commerzbank is currently evaluating the combined bank's office space in Frankfurt, according to spokeswoman Beate Schlosser: 'We're evaluating our space requirements but it's too early to say which buildings we will continue to need,' she said.

However, the combined bank is likely to have 'a significant' amount of redundant office space across Germany and, most significantly, in Frankfurt, said Raffaele Lino, head of business development in Europe at DTZ in Frankfurt.

'If a lot of office space were to come on the market at once, this could put a dampener on the market and push up vacancy rates,' said Lino. 'In addition, some banking space is easier to lease than others. Branch offices in city centres can more easily be converted into retail space but back-office space in older buildings may be harder to re-let,' he added. Vacancy rates in Frankfurt currently stand at around 13%, according to Cushman & Wakefield.

One company that is likely to be eyeing the consolidation watchfully is US private equity group Fortress Investments: its Eurocastle Investment vehicle bought a portfolio of 303 properties - totalling more than 845,000m² - from Dresdner Bank for EUR 2 bn in 2005. The portfolio comprised predominately office properties in cities such as Frankfurt, Hamburg and Munich.

'Most of the properties are on leases of three, five and seven years. There is now a risk that many of these buildings - which include bank branches and back office space - will be surplus to demand as the two banks consolidate, which could leave Fortress with a lot of empty space on its hands,' said one Frankfurt-based real estate analyst, who asked not to be named. Fortress could not be reached for comment.

In addition, IFRS accountancy standards, which many German banks adhere to, dictate that as soon as a company has identified surplus office space - a given following a restructuring on this scale - a provision must be 'booked' for the remainder of the lease costs, according to PricewaterhouseCoopers.

'If you are laying off large numbers of staff, whereby a great deal of office space will no longer be needed, you will have to book a provision for the gap between any rent still due until the lease runs out and the net revenue you estimate you can get from a sub-leasing of that space in the open market - and that could be very sizeable,' said Martin Brühl, a managing partner at Cushman & Wakefield in Frankfurt.

Commerzbank will issue up to 65.4 million new shares to help fund the deal, subject to market conditions, which brings together Germany's second-and-third largest banks by assets. However, it will have its work cut out to convince investors: they gave the merger a sever thumbs down when the deal was announced on 31 August, wiping 16% off the share price in the days that followed, taking it to EUR 16.79 on 5 September, reflecting investor uncertainty over possible cost savings.

Nevertheless, the bank is hoping that the takeover will generate higher profits and has not ruled out further acquisitions, although it declined to comment on whether it will bid for Postbank, which Deutsche Post is hoping to offload in Germany's overcrowded retail-banking market. The combined bank also intends to reduce its total number of branches to 1,200 by 2012, down from 1,540 at present. Worldwide, the new bank serves almost 14 million private customers.

Allianz will be the biggest shareholder in the combined bank with almost a 30% stake. It will also acquire Commerzbank's asset management business, Cominvest, for EUR 700 mln as part of the deal. Italian insurer Generali has indicated that it will retain its 8.8% holding in Commerzbank.