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HRE sale shows hunger for real estate risk

Government IPOs Deutsche Pfandbriefbank; Commerzbank sells €2.9 billion loan portfolio.

Eurozone lenders and the German government offloaded more legacy real estate assets last month, as institutional investor appetite for European property financing hots up. 


 The low international interest-rate environment

has sharpened

investment hunger among institutional investors

Martin Blessing,

In July state-owned Hypo Real Estate sold a majority stake in Deutsche Pfandbriefbank via a €1.2 billion IPO and reprivatisation, while Commerzbank announced real estate loan sales (including a large chunk of bad debt) worth €2.9 billion in two transactions with JPMorgan, Lone Star and Oaktree. 

Spain’s CaixaBank also said it had sold a portfolio of developer loans worth more than €500 million to a single investor.

Deutsche Pfandbriefbank’s IPO attracted a mix of hedge funds and long-only investors from Germany, the US and UK, and traded up on its first day. 

It priced at €10.75 a share, just over half book value and likely meaning the government will make a small profit on its investment in the bank. 


The bank had to be sold by the end of this year as a condition of the HRE group’s 2008 bailout, but worries about a possible Greek exit from the euro delayed the IPO for a week. 

“Considering the current capital market environment, we are confident that we have achieved a good price,” says Herbert Walter, chairman of the German government agency managing the sale, the FMSA. 

Since the bailout, Deutsche Pfandbriefbank has built up a new loan book focused on government-backed infrastructure projects and, above all, European commercial real estate. 

In 2014 the bank lent more than €10 billion and tapped wholesale markets for €6 billion, including almost €4 billion of Pfandbriefe or covered bonds.

Run off

Andreas Bernstorff, managing director in equity capital markets at Citi, which coordinated the deal alongside Deutsche Bank, says the IPO happened after several months of investor education, with a close comparable being German real estate specialist Aareal Bank. The bank’s intention to run off low-yielding nonstrategic assets (mainly public debt) was marketed as a prop for future dividend payments and profitability growth, as capital is plugged back into new business, potentially increasing return on equity from the low single digits it posted last year. 

“There aren’t many banks with a recovery story like this, which trade below book value and with good liquidity,” says Bernstorff.

FMSA’s Walter says an IPO was the best way of keeping the bank alive and returning as much money as possible to German taxpayers. 

The alternative would have been winding it down, as happened to Hypo Real Estate’s former public-sector lending arm, Depfa. 

The necessity to gain regulatory approval for a sale to a strategic investor was seen as complicating a buyout by a hedge fund or private equity firm, though the state did receive interest from strategic buyers, according to an FMSA spokesperson.

The gap between banks as potential sellers and investors as potential buyers has now closed in a significant way

Gonzalo Gortázar, CaixaBank

Commerzbank chief executive Martin Blessing says that low interest rates are also helping his bank tighten targets for reducing non-core real estate assets – many of which pertain to its former subsidiary, Euro Hypo (previously a competitor of HRE). 

Its transactions last month involved the €700 million sale of a German portfolio to Californian private equity firm Oaktree, and the €2.2 billion sale of a wider European portfolio to JPMorgan and Texan private equity group Lone Star. 

“The low international interest-rate environment has created some more interest in the assets,” says Blessing. “It has sharpened investment hunger among institutional investors. They see good opportunities, and we see good opportunity to reduce our balance sheet and refocus the business.” 

Commerzbank is now aiming to shrink its real estate and shipping portfolio to €20 billion by 2016, from €30 billion at the end of the first quarter. 

“Unless the real estate market collapses completely over the next 12 months, I see no risk of missing that target,” Blessing says.

Spanish portfolio

Meanwhile, CaixaBank, the biggest domestic lender in Spain, sold a portfolio of real estate loans to an investor for more than $500 million in the past six weeks, according to its chief executive, Gonzalo Gortázar, although further details are yet to be announced. 

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Gortázar says CaixaBank’s principle strategy for running down non-core real estate assets is via branches and a real estate servicing joint venture with US private equity fund TPG. 

But this year, he says, CaixaBank is focusing more on wholesale divestitures, as these buyers are no longer obliged to factor in property-price declines into expectations for returns.

“The bid that institutional investors can put on real estate is more attractive,” says Gortázar. “The gap between banks as potential sellers and investors as potential buyers has now closed in a significant way. On the banks’ side, the level of provisions that they have accumulated in their loan books also allows them to find that market prices are much more attractive.”

Until around two years ago, Gortázar says most of the funds looking at assets in the Spanish real estate market were distressed investors, looking for returns of between 20% and 25%. 

He says: “As the Spanish recovery becomes more obvious to the outside world, and given the lack of interesting opportunities in many markets, investors looking at real estate in Spain are now expecting more reasonable profitability targets.”

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