Editor's choice: Bad banks are feeling better

After seven tough years of restructuring, Germany’s bad banks are clearly feeling better. This week it emerged that Hypo Real Estate Holding (HRE) is gearing up to divest its entire stake in pbb Deutsche Pfandbriefbank or to exit via an initial public offering.

Pbb is 100% owned by HRE which, in turn, is fully owned by SoFFin, the Financial Market Stabilisation Fund set up by the German government following the collapse of Lehman Brothers in September 2008 to stabilise the German banking industry.

The German government nationalised Hypo Real Estate in the aftermath of Lehman Brothers' collapse and the real estate lender received a €10 bn capital injection as well as €145 bn in liquidity guarantees under the condition it would sell pbb at a future date.

Pbb is not the only bank on the block in Germany. Bad bank EAA is 'already at an advanced stage' with the disposal of WestImmo, the real estate lending arm of failed lender WestLB. EAA, which is tasked with winding down WestImmo's assets, ‘intends to sell WestImmo in its entirety, including its loan portfolio,’ to one bidder, a spokesperson told PropertyEU.

According to a Frankfurt-based analyst, mortgage bank Aareal Bank is believed to be the sole bidder left standing for WestImmo, with around €10.4 bn of loans on its balance sheet. if Aareal succeeds, it will mark the lender’s second acquisition of a rival in the past two years, following its acquisition in 2013 of Corealcredit from US private equity group Lone Star for €342 mln.

The European Commission had originally asked for WestImmo to be sold by the end of 2011 as part of its conditions for parent company, WestLB's, bailout. The latest attempt to sell WestImmo comes more than three years after exclusive talks with private equity investor Apollo failed.

In better shape
A similar scenario is unlikely to befall pbb, according to that bank’s management. 'We have done all the preparatory steps; in organisational and business model terms we are now in the shape we want to be in,’ management board member Bernhard Scholz told PropertyEU last year. ‘The markets at the moment are quite attractive, much better than a few years ago. I also believe that we have one key advantage compared to past sales; we are fully funded and this makes a huge difference between us and some other players which went on sale in the past.'

That optimism marks a clear break with the post-Lehman sentiment in Europe and which is now gradually spreading across the continent. While many US and UK banks are already coming to the end of their loan disposal programmes, Germany is only now getting started. In the coming year, sales of loan portfolios – both performing and non-performing - are expected to dominate the German real estate landscape as both lenders and open-ended funds accelerate their sales programmes.

The timing is good. Loan portfolios are becoming increasingly popular with investors looking to diversify and commit big chunks of capital. ‘The market is very favourable at the moment,’ agreed Dirk Richolt, head of real estate finance at CBRE in Frankfurt: ‘Margins and interest rates are low. Five-year swap rates are now only a quarter of where they were in January last year.’

Billions of loan sales expected in 2015
Opportunities abound. Cushman & Wakefield is forecasting that there could be as much as another €70 bn in loan sales to come to market across Europe this year after more than €80 bn of closed European commercial real estate (CRE) and real estate owned (REO) loan sales last year.

Spain’s Sareb is also expected to accelerate the pace of disposals in the next months. In addition, a €750 mln Spanish CRE loan portfolio known as ‘Project Gaudí’ that previously belonged to Hypo Real Estate, is also on the market. It is now held by Germany’s other ‘bad bank’, FMS Wertmanagement, into which €27 bn of Hypo Real Estate’s assets were transferred in 2010, following the lender’s collapse in 2009.

Competition for the portfolio is likely to be intense, according to Marcus Lemli at Savills: ‘It’s the sort of thing that everyone is looking at. There is a lot of opportunistic money looking at Spain, so interest will be huge.’

Debt is no longer an unloved four-letter word
All in all, debt is no longer an unloved four-letter word in this part of the world. To be sure, it never was for US private equity giants like Cerberus, Blackstone and Lone Star who picked up record amounts of European loan packages in 2014. But they are facing increased competition from home-grown players. Earlier this year, Germany's Otto Group emerged as the buyer of a non-performing loan portfolio secured by German real estate assets with a face value of €650 mln, PropertyEU revealed.

Even Europe's institutional investors are acquiring a taste for debt. Earlier this week AXA Real Estate announced it has raised more than €1.5 bn for Europe’s largest commercial real estate debt fund with commitments from 11 institutional investors in the UK, the Netherlands, France and Switzerland. Only two of the investors were AXA insurance companies.

As Isabella Scemama, head of fund groups at AXA Real Estate, put it, the significant size of this tranche of commitments ‘clearly demonstrates how real asset finance has now become an accepted asset class with a specific allocation from most institutional investors’.

In short, it's not only the banks that are feeling better about their debt positions. Indeed, institutional investors are starting to feel as comfortable with debt in their portfolios as bricks and mortar.

Judi Seebus
Editor in chief