Friday Letter Who's lending now?

At the Expo Real property show in Munich this week, it was the question on everybody’s mind. 

At the annual Expo Real property fest in Munich this week there were approximately 42,000 participants, but not many of those were lending any money.

Setting the tone on Monday, visitors to the trade fair (Europe’s largest property event) were rocked by news that the German government and various institutions had agreed a new €50 billion lifeline for commercial property lender Hypo Real Estate. Television news crews surrounded Hypo’s stand as it became the symbol of the deep freeze European banks have entered into.

The next day brought the resignation of Hypo’s chief executive Georg Funke, and by Day Three of the show, unusually for Hypo its stand was virtually empty of people.

But it wasn’t just Hypo that was causing fear among the rank and file of Europe’s property industry. Most other banks were admitting that they were not faring much better.

One employee at a German rival to Hypo explained to PERE on Tuesday how the prior evening senior executives of the bank had met up to discuss strategy. Though some employees hoped it would increase rates in order to boost profits, instead the bank decided to stop underwriting new business altogether until further notice.

As the week wore on, the news flow seemed to get more alarming. Spain announced an emergency €50 billion fund to buy up assets from its banks to try to ensure their smooth running. The UK announced a mind-boggling €628 billion rescue plan for banks and building societies to use should they need funds. (A few looked like they did, for example Royal Bank of Scotland whose shares tumbled 40 percent on Monday). Then, Iceland nationalised its two largest banks. By the time visitors were leaving, Iceland was finalizing the nationalisation of a third bank. There was hardly time for delegates to digest one bit of shocking news, before the next arrived.

Sure, delegates were putting a brave face on events, trying to knock back champagne on the stands with the usual gusto, but there was a palpable sense of concern.

The private equity real estate funds present were telling their advisors they are simply waiting for things to get even worse before investing, but the question remained who will lend to them?

This year’s Expo will be remembered for what happened to Hypo and Europe’s other top banks.

The accordion player at the entrance to the Munich U-Bahn near the trade halls was playing suitably melancholic music. Somehow, no other kind of music would have been appropriate.