Portfolio sales to drive German market this year

Portfolio sales are expected to dominate the German real estate landscape this year as both lenders and open-ended funds accelerate their sales programmes. PropertyEU spoke to market experts about some of the biggest deals hanging over the market.

Loan portfolios – both performing and non-performing - are becoming increasingly popular with investors looking to diversify and commit big chunks of capital. There were more than €80 bn of closed European commercial real estate (CRE) and real estate owned (REO) loan sales in Europe last year, according to Cushman & Wakefield, which is forecasting that there could be as much as another €70 bn to come to market across Europe this year.

While many US and UK banks are already coming to the end of such disposal programmes, Germany is only just getting started. Subsequently, of the €70 bn in potential loan sales this year, as much as 20% could come out of Germany, according to Frank Nickel, chairman of corporate finance for the EMEA region at C&W. ‘I would predict that Germany would account for between 10% and 20% of the €70 bn forecast for this year,’ he said.

Moreover, the size of loan portfolios has rocketed in the past year as lenders take advantage of growing investor demand to shift ‘mega’ portfolios: ‘Sellers are testing the market by trying to bundle several billion in loans in one portfolio for a single exit,’ Nickel said.

WestImmo loans
One such seller is Germany’s Erste Abwicklungsanstalt (EAA), the 'bad bank' tasked with winding down the assets of WestImmo, the real estate lending arm of failed lender WestLB. ‘The EAA has €10.4 bn of WestImmo’s loans to sell – we are still waiting to hear how exactly they plan to bundle them up,’ Nickel said. A spokesperson for the EAA told PropertyEU that it ‘intends to sell WestImmo in its entirety, including its loan portfolio,’ to one bidder. ‘The sales process is already at an advanced stage,’ she said, declining to provide further details.

However, according to a Frankfurt-based analyst, Aareal Bank is believed to be the sole bidder left standing for WestImmo. ‘The advantage of buying WestImmo is that it is healthy with good assets left. I would expect the unit itself to sell at a discount of around 50% to book value,’ he said. (The EAA put WestImmo’s equity capital as of June 2014 at €575 mln.) The EAA is expected to make an announcement shortly regarding the sale.

Putting a price tag on a lender is complicated because one of the key issues is ‘how to value the liabilities of the bank’, according to Marcus Lemli, CEO of Savills in Germany. ‘It’s very hard,’ he said. However, if Aareal succeeds in acquiring WestImmo it will mark the lender’s second acquisition of a rival in the past two years, following its acquisition in 2013 of rival 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.) Aareal declined to comment.

Project Gaudi
In addition, a €750 mln Spanish CRE loan portfolio, known as ‘Project Gaudí’ that previously belonged to Hypo Real Estate – now known as pbb Deutsche Pfandbriefbank - 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 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.’

A spokesman for the FMS confirmed that the portfolio is on the market but declined to provide further details. However, market sources told PropertyEU that the portfolio comprises 18 loans which are broadly equally split into performing, sub-performing and non-performing loans.

They are secured by a broad range of assets including the Ritz-Carlton managed Hotel Arts in Barcelona, five shopping centres, four business parks in Madrid and Barcelona and several residential and industrial development sites. C&W’s Corporate Finance team has been mandated to sell the portfolio. C&W declined to comment.

The FMS still has just under €10 bn of real estate assets to divest, most of which are loans, the spokesman said. The aim is to divest them by 2020, having sold around €3.3 bn of assets last year. The spokesman declined to comment on upcoming sales this year.

For banks seeking to offload loan portfolios, now is ‘as good a time as any to sell’, according to Dirk Richolt, head of real estate finance at CBRE in Frankfurt: ‘The market is very favourable at the moment. Margins and interest rates are low. Five-year swap rates are now only a quarter of where they were in January last year.’

Hypothekenbank Frankfurt, formerly Eurohypo, the real estate lending arm of Commerzbank - which was also bailed out by the German government in 2009 - is also expected to offload some loan portfolios this year as part of its winding-down process. It is expected to bring to market a large German portfolio as well as a big pan-European portfolio, according to those who track the market. A spokesman for Commerzbank declined to comment on potential sales but said: ‘We observe the markets permanently and try to take advantage of opportunities if they occur.’

Shift in driver
JLL is forecasting an increase in portfolio sales this year, according to Marcus Lütgering, head of office investment in Germany at JLL: ‘I expect to see an increase in the number of deals in Germany this year in excess of €100 mln. We had around 20 such deals in the office sector last year. I think we’ll see a lot of portfolios in the €200 mln to €500 mln range come to market in the first quarter, including pan-European portfolios, some of which will be sold by banks to boost their liquidity,’ Lütgering said. Many of these portfolios will have been acquired between 2006 and 2007, shortly before the financial crisis.

German open-ended fund manager Union Investment is believed to be mulling the sale of a €500 mln pan-European property portfolio, according to those who track the market. ‘For 2015, our target is to sell pan-European properties totalling about €1 bn,’ a company spokesman said. ‘Last year, we sold 23 properties totalling around €1 bn.’ He declined to comment on specific sales. Swiss developer and investor Realis is also understood to be selling a pan-European portfolio worth between €200 mln and €300 mln, according to those who track the market. Realis could not be reached for comment.

Interestingly, there has been a marked change in the past six months in terms of what is bundled into a portfolio, Lütgering said. ‘Today, the volume of the portfolios is the key driver, whereas before, the long-term income potential was more important. Investors are also much more willing now to take on a range of assets in a portfolio, comprising assets from €10 mln to €100 mln in different locations and with different risk profiles. This reflects the strong demand for portfolios,’ he said.

There is also heightened demand today for ‘big ticket’ deals, Lütgering said: ‘The bigger the ticket, the greater the number of bids. It’s not unusual to get as many as 20 bids, even on big deals, due to investor demand.’ As a result, investors are also looking at regional cities in search of additional investment opportunities. Strong demand has pushed prime office yields down in the past year to 4.2%-4.5%, compared to 4.7% last year. Similarly, secondary office yields have fallen to as low as 5.2%, down from up to 7.2% last year, according to JLL.

Pbb up for sale
Meanwhile, the sale of German lender Deutsche Pfandbriefbank has officially been launched with parent group Hypo Real Estate Holding (HRE) looking to divest its entire stake or to exit through an initial public offering.

HRE said earlier this week that it has hired Citigroup and Deutsche Bank as financial advisers for the sales process, adding that a potential IPO is also being prepared as an alternative option.

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.

'We are embarking upon re-privatisation, against the background of a very positive performance over recent years, solid results for 2014, and an outstanding position on the credit and capital markets,' commented Andreas Arndt, pbb's co-CEO and chief financial officer.

Could QE cause an asset class bubble?
The announcement by the European Central Bank in January that it would launch a massive trillion-euro bond purchase programme to ward off deflation and end stagnation in the eurozone could also have an impact on Germany’s real estate market, according to Richolt at CBRE. ‘It’s unlikely that the Bundesbank will buy up a lot of bonds, which begs the question: who will buy up the German bonds, will they be allocated to other eurozone countries? The ECB has said that it will buy up €60 bn of bonds a month – but at that level, they’ll be buying at any price and yield.’ Institutional investors, on the other hand, look to buy bonds at a certain price limit and yield. ‘If the ECB is willing to pay any price, institutional buyers of bonds will get priced out of the market and be left with junk bonds and equities,’ Richolt warned. The move could potentially have dire consequences, he said. ‘It could create an asset class bubble – the biggest asset class bubble so far – and we know where that got us last time. The other question is how quickly all of this will impact on the German real estate market and pricing,’ he added.

Others maintain that QE in the eurozone is a lifeline for the market. ‘It will improve liquidity and loan terms, although margins will be compressed further,’ said Schürmann. ‘All banks want to do more business but last year some loan margins were as low as 60-65 bps. It’s very hard for a lender to make money on that; it’s not a sustainable model in the long term.’

Sara Seddon Kilbinger
Correspondent German-speaking countries