Eurohypo pulls out of lending

The case for bringing forward European debt funds grew even stronger this week as Germany’s Commerzbank announced subsidiary real estate lender, Eurohypo, was abruptly pulling out of real estate lending altogether.

The demise of Eurohypo, which has a European commercial property lending book of approximately €56 billion, shocked elements of the market as its parent company announced it would be regarding property lending as a non core activity going forward.

In the first place, the decision is being taken as a blow to those that need to finance commercial property transactions in the region as Eurohypo has been one of the most active lenders in Europe over the past decade. As recently as October it was named by London property agent Savills one of the top 16 ‘big-ticket’ lenders. A trawl of investments by private equity real estate firms in the last six years alone reveals that borrowers from Eurohypo include The Carlyle Group, Rockpoint Group, Tishman Speyer, Perella Weinberg, AXA Real Estate Investment Managers, MGPA, Benson Elliot, Pramerica Real Estate Investors, and Resolution Property.

Though the retrenchment is bad news on the face of it for private equity real estate firms, at the same time it deepens the need for alternative sources of real estate finance in Europe, some of which could be provided by property funds including those managed by private equity real estate platforms. In just one example Goldman Sachs’s co global head of real estate, Jim Garman, told PERE earlier this month of plans to bring a credit product to Europe.

Commerzbank is meeting a requirement of the European Commission to wind-up Eurohypo, but the announcement on Tuesday represents an acceleration of that move.

Commerzbank indicated Europe’s economic volatility and high capital and liquidity requirements of the Basel III banking regulations were key factors. “In view of the continuing uncertain situation on the financial markets, the heightening of the sovereign debt crisis and the increasing regulatory burdens, Commerzbank intends to accelerate the path it has already taken, with its focus on customer-centric and profitable core business, the minimisation of risks and a reduction in complexity. The board of managing directors has (today), therefore, decided to wind up the business areas Commercial Real Estate and Ship Finance in the course of time.”

Though Commerzbank has been told to wind up Eurohypo, its announcement nevertheless provoked criticism and accusations of it performing a U-turn. That is because a few weeks ago Commerzbank seemed to say Eurohypo would return to lending from July this year after a lull in its programme. It had said a new Real Estate and Ship Finance division would concentrate on four core markets, Germany, the UK, France and Poland .

However, explaining the bank’s latest decision, managing board chairman, Martin Blessing, said:  “Against the background of the ongoing financial and sovereign debt crisis, an end to which is not foreseeable, and of the uncertain regulatory environment, we are subjecting all the business areas to a rigorous review. The strategic objective is that of consistently focusing Commerzbank on customer-centric and sustainably profitable core business and further minimising risks and capital lockup. In the course of this process we have as an initial move, therefore, decided to reduce the business areas originally planned for the new Real Estate and Ship Finance segment in the course of time or transfer them to the Core Bank,”

The Commercial Real Estate and Ship Finance division is to be shifted to the new Non Core Assets group, he said. “The essential reasons for this are the high capital and the rising liquidity requirements under Basel 3, and especially for long-term financing, as well as the strong cyclical fluctuations which are to be expected in the results in the future.”

Eurohypo is to be renamed Hypothekenbank as part of the process.

Already the decision has led to reports that the UK team of Eurohypo is pondering a management buyout. In the meantime, the London-based office sought to reassure existing borrowers, which would include private equity real estate firms.“The decision will have no immediate effect on many existing UK business clients. Contractual obligations and commitments will continue to be honoured and business in the UK will continue to be serviced with no changes,” the UK Eurohypo lending team told clients in one communication.

It added: “The UK book of business will be reduced in an orderly process and there is no defined timetable for this windup process.”