Experts: wind-down of Hypo Real Estate is best option

UPDATED 14 FEBRUARY 2011 - Hypo Real Estate’s days could be numbered. According to a report commissioned by Germany’s federal government, a wind-down of the troubled bank should be ‘seriously considered’.

The report - which will be published on Wednesday - investigated how the German state could exit from banks that it bailed out during the financial crisis. It suggests that phasing out the HRE Group - including its main operations at pbb Deutsche Pfandbriefbank – may well be the best option given that a sale is not expected to generate significantly more capital than a wind-down. The report was compiled by a committee headed by Professor Daniel Zimmer at the University of Bonn.

Zimmer and his team have been working on the report since last June, he told PropertyEU. However, he is not permitted to discuss its contents until the report is released

The German government is widely expected to refer to the report in its weekly press conference this Wednesday.

Unsurprisingly, Hypo Real Estate does not share the committee's recommendation that a wind-down of Hypo Real Estate in its entirety should be considered, especially as it has already transferred EUR173bn of toxic assets to ‘bad bank’ FMS-Wertmanagement.

‘For the bank’s future-orientated, strategic business, re-privatisation is the option which would maximize value, enabling the support which has been provided out of tax money to be returned,’ a Deutsche Pfandbriefbank spokesman told PropertyEU.

If the German government does decide to wind down Hypo Real Estate, it will have a knock-on effect on the market, Marcus Lemli, head of capital markets at Jones Lang LaSalle in Germany, told PropertyEU.

‘Hypo Real Estate is a major player here. Real estate is all about debt and equity and we need both for the market to function. If HRE was to be wound down, we would lose a major provider of debt, so the availability of debt would shrink,’ Lemli warned.

Nevertheless, Hypo Real Estate’s disappearance wouldn’t completely change the landscape, Lemli said, as new providers of debt have evolved and new funds are closing the gap between senior debt and equity. ‘Banks are being very careful, they’re mainly focusing on senior debt that they can refinance,’ he said.

Deutsche Pfandbriefbank returned to profitability in the third quarter of last year and has said that it expects to remain profitable this year. Liquidity support from the Financial Market Stabilisation Fund is no longer needed and has not been required since October 2010, its spokesman added.

‘In addition, it is highly probable that a wind down of HRE would have negative effects for the entire finance and insurance branch,’ a spokesman said.

To date, no deadline has been set for deciding Hypo Real Estate’s fate. However, according to some real estate analysts, in view of the amount of state support the bank has received in the past two years, it would be ‘strange’ to throw in the towel now, especially as it has since returned to profitability.

‘From the government’s standpoint, they have supported the banks for the past two years and have solved the systemic risk by ring-fencing the problem in this way. If they do decide to sell Hypo Real Estate, private equity groups might be interested in acquiring it – although they might not pay an actual price,’ Lemli of Jones Lang LaSalle said.

Deutsche Pfandbriefbank is one of the largest issuers of Pfandbriefe, or covered bonds, in Germany. Around EUR8.75bn in Pfandbriefe have been issued in total in Germany this year, according to Germany’s Association of Pfandbriefe, Verband deutscher Pfandbriefbanken. This comprises nine transactions, of which two were sub-Jumbo – less than EUR1bn in volume. The total issuance of benchmark formats in 2010 was about EUR26 bn in Pfandbrief, a spokesman for the Verband deutscher Pfandbriefbanken told PropertyEU.