FIG Watch: Reformed HRE Group seeks real estate dominance

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By:
Florian Neuhof
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Having emerged from a reshuffle in in the Hypo Real Estate Group at the start of the year, Hypo Real Estate Bank International is the most significant institutional response to the Pfandbrief Act yet. The merger of two banks with distinct business models and funding tools has created a real estate financier well equipped to match its hunger for growth, writes Florian Neuhof.

Robert Grassinger, member of the board at Hypo Real Estate Bank International Grassinger: diversification is key
Since HVB decided to dispense with its commercial real estate business in 2003, creating the Hypo Real Estate Group, the organizational structures in which Robert Grassinger, member of the board at Hypo Real Estate Bank International responsible for treasury, funding and securitization, operates have been in a state of flux.

Grassinger began his career at Württembergische Hypothekenbank in 1997 and his rise in the Stuttgart-based institution has gone hand in hand with the restructuring of the bank around him. He has been head of the financial markets department since 2003, the year the Hypo Real Estate Group became effective, and became a deputy member of the board of WürttHyp in 2004. After the Pfandbrief Act and its abolition of the specialist bank principle came into effect in 2005, another transformation occurred. In January 2006, WürttHyp’s and Dublin-based Hypo Real Estate Bank International’s activities were combined. And Grassinger, now a full member of the board, faced the task of overseeing the integration of the market activities of the new organization, which is named after the Dublin bank but is based in Stuttgart.

Pure volume

With a real estate portfolio of €32.6 billion and a total loan portfolio of €48.6 billion, the new bank is big. “The new group architecture, as we call it, has of course had major implications for my job and for the treasury and funding department,” says Grassinger. “The easiest criterion to use is pure volume. I worked for the funding department of Württemberger Hypo before, where the funding requirements were €6 billion to €8 billion. Today for Hypo Real Estate Bank International it’s €16 billion to €19 billion in 2006. So we nearly tripled the volume.” According to Grassinger, the treasury department and funding strategy have been fully integrated, and he expects the final touches of the internal organisation to be completed within the first half of the year.

The new structure could only come into existence because of changes to the Pfandbrief law, and consolidation opened a goldmine in terms of funding. The Pfandbrief Act abolished the special banking principle that prohibited banks other than specialist mortgage lenders, which did not engage in other activities, to issue Pfandbriefe. The old Hypo Real Estate Bank International did not fall into that category. And it did not issue Irish covered bonds because of the small scale of the local covered bond market, and because the Irish covered bond law requires residential mortgages to be the mainstay of the collateral. With this obstacle out the way, the assets of the Dublin bank can now be transferred into Pfandbrief collateral, providing the basis for one of the cheapest refinancing tools available on the debt markets. “The Pfandbrief is the most powerful funding tool we have at hand,” emphasizes Grassinger.

The amalgamation of the two banks makes sense in other respects too. Both specialize in loans from outside Germany and issue commercial rather than retail loans. Hypo Real Estate Bank deals with loans issued in Germany. The group also encompasses the Hypo Public Finance Bank, which is the legal successor of the old Hypo Real Estate Bank International and is based in Dublin, and the Hypo Pfandbrief Bank International, based in Luxembourg. Both are separate entities, even though the Stuttgart bank is guaranteed by the Dublin bank, which in turn guarantees the bank in Luxembourg. As Grassinger argues: “Efficiency gains by segregating markets are a core rationale for the new structure.”

And while the old entities had distinct business models, Grassinger argues that the restructuring reflects developments in the debt market. “You had two different business models, one was a structured finance model with the old Hypo Real Estate Bank International. The Württemberger Hypo had what I call stock-orientated business, where the portfolio that you keep on the balance sheet is the driver behind it, ramping up the portfolio and refinancing it efficiently by Pfandbriefe. As there is an ongoing convergence between the two business models, we decided to bring them into one organization.”

Holy grail

Diversification is something akin to the holy grail in the debt capital markets, and bringing together the distinct business models of the Stuttgart and Dublin banks has created an arsenal of different loan offerings and funding options, as well uniting their global distribution networks.

While WürttHyp relied on Pfandbriefe, the main funding tool of the old Hypo Real Estate Bank International was senior unsecured bonds. The new bank is a major issuer of both products. Grassinger explains that approximately 25% of the bank’s funding is short term, for instance by commercial paper or money market products. Long-term funding in 2006 will be split approximately 35% Pfandbriefe, 30% senior unsecured and 10% securitizations.

“We issue from small private placements down to €5 million, up to benchmark jumbo issues of €1.5 billion. We also issue in different complexities, ranging from plain vanilla bonds to highly structured bonds with all kinds of different optionalities, gimmicks, and bells and whistles,” says Grassinger. This creates a wide variety of products, the most notable categories being covered bonds and senior unsecured bonds, but also includes mortgage-backed securities.

This mix of different size and complexity is reflected on the asset side. “We offer the whole product range, starting from very simply structured, very low risk senior loans, which are then put on the balance sheet and are refinanced with Pfandbriefe, up to highly structured financing, where securitization and other capital market tools are involved.”

Expanding business in different markets is another prime objective for the bank. Grassinger says: “For us, diversification is key. There are two directions that this can take. Direction one is in products, direction two is in regions.” Hypo Real Estate International already has a network of branches and subsidiaries that do business in Europe, Asia and the US. At the moment, the most important market for its debt instruments remains Germany, which constitutes around 40% of the investor base, with the rest of western Europe only marginally behind.

“It is extremely important to us to create different markets that differentiate themselves by slightly different legal frameworks,” says Grassinger. “We don’t want to be dependent on a single market, so we target not to go beyond getting more than one-third of our funding from a one market. We want Germany to be no more than a third of our investor base, western Europe to be a third, and then the rest of the funding being non-European. That would be an ideal share.”

Because the non-European share is not big enough for this best-case scenario, raising the profile abroad is high on the list of priorities. The new bank will continue to do at least one Asian roadshow a year. This includes the Pacific Rim, which explains the recent issuance of a Kangeroo bond, a €$200 million (US$150 million) Pfandbrief launched in Australia that was lead managed by ABN Amro. It was the first time a German Pfandbrief issuer has issued in this currency. The bank is also closely monitoring developments in Canada, where legal changes have opened up that market for foreign issuers.

The bank also has a clear idea of what type of investors it wants to attract, preferring long-term, real-money investors. “Our priority is to have small tickets placed with buy-and-hold investors. There might be cheaper opportunities but they are not wise,” says Grassinger. To ensure that their bonds go to the right kind of investors, they monitor the performance of the dealer groups, poring over the lists of buyers supplied by the dealers.

Creating a heavyweight in real estate financing points to ambition. And, sure enough, Grassinger makes plain that the bank is planning towards further growth, rather than aiming to consolidate. “Our mission is to become one of the largest real estate financers in the world, and I can say that because we are specialized and in this niche we want to become one of the world’s leading players.”
 
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