IVG looks to debt funds for relief

A looming refinancing operation has pushed listed German property stock IVG into a tight corner.

Former German listed heavyweight IVG Immobilien has seen its fortunes turn dramatically in the past five years. Once the leader of the German property pack with a market capitalisation of €7.2 bn in 2007, the company has since dwindled into a penny stock with a market cap of just €83 mln in May this year. Since March, the company’s share price has plunged by 80%, sending the stock under the €0.40 mark - or more than 90% below reported net asset value of €4.02 per share.

It has not been the company’s performance that has spooked investors. Funds from operations improved from zero in Q4 2012 to €7.7 mln in Q1 2013. The real cause of concern is the company’s €4.2 bn debt burden which has resulted in a loan-to-value ratio of 72%. A few years ago, that would have been considered a very comfortable level, but now it is simply too high, according to Steffen Sebastian, Professor for real estate financing at the IREBS Institute of the University of Regensburg. 'Debt levels above 60% are currently hard to finance in Germany.'

Basel III and EU regulations have forced German banks to tighten the lid on property loans and credit is drying up fast
in Europe's largest property market. Most German banks are already implementing the upcoming Basel III regulations and are demanding lower LTV ratios. In addition, Germany's regional Landesbanken like BayernLB, HSH Nordbank, and NordLB which were once dominant players in the field of property financing, have been ordered by the EU to reduce their property lending portfolios after the state-owned institutes received massive government bailouts during the financial crisis.

'For IVG's shareholders the consequences could be dramatic,' said Georg Kander, an analyst at private bank Bankhaus Lampe in Düsseldorf. IVG already announced the 'probable exercise of a put option' of a convertible bond with a nominal value of €400 mln, but that may not be enough to secure an extension for the rest of the debt. 'The company may be forced to make a capital increase which would further water down the value of its shares,' Kanders explained.

IVG is not by any means the only real estate investor in Germany experiencing problems on the financing front. 'Many banks are still as restrictive as they were after the collapse of Lehman Brothers,' said Philipp Ehlebracht, head of Schroder Property’s Continental European business. According to a survey held by the UK-based company, 38% of German market participants said they are already facing difficulties finding adequate financing.

However, there may be light at the end of the tunnel. In order to grow their business and profit margins in the face of Basel III and EU regulations, German banks have begun to launch debt funds targeting institutional money for real estate financing. With projected yields of 5%, the new vehicles appeal to foundations?, insurance companies and pension funds struggling with miniscule yields from triple-A rated bonds. iii-Investments, a wholly-owned subsidiary of Hypovereinsbank, has accumulated €200 mln for its first debt fund within weeks and has already launched a second vehicle. 'The first closing of €100 mln for our second fund has also already been secured,' Reinhard Mattern, CEO of iii-Investments, told PropertyEU.

Deutsche Hypo, the real estate finance arm of Norddeutsche Landesbank, is also currently preparing its first debt fund with a volume of €500 mln. 'We are seeing great interest from pension funds and smaller insurance companies for our vehicle,' said Andreas Pohl, member of the board at Hannover based Deutsche Hypo. Fondshaus Hamburg Immobilien (FHHI), a specialist for closed-ended real estate funds, has started two closed-ended debt funds with a volume of €30 mln each targeting wealthy private investors. 'The credit squeeze in the property sector offers opportunities not only for institutional money but also for private investors,' said FHHI managing director Angelika Kunath.

However, IVG and other investors with LTVs above 60% may not profit from the debt funds in the near term. So far, these new vehicles only target loans with an LTV at or below 60% in order to minimise risk. 'But in order to achieve their yield goals in the long run, debt funds will have to take on higher risk', argued Marcus Lemli, Head of European Investment at Savills. That may well become the case once fund managers and institutional investors gain more experience with these new vehicles. In the US where debt funds were established more than a decade ago, financing is available for LTVs of up to 80%.