Question & Answer: Nicolaus Harnack, The Situs Companies
PERE: How are Europe’s banks dealing with their real estate book?
Nicolaus Harnack: Many banks have created internal restructuring teams but have not yet decided to outsource much of the workout or asset management of these portfolios. Some banks are looking to significantly reduce their exposure to real estate, some banks are discreetly winding down their exposure to certain markets that are no longer considered important for their core business and some banks have very esoteric loans in locations that they are not able to manage with their own limited resources. So, this may change in the future.
PERE: What strategies are they following?
NH: A good many banks across Europe pursued the model of following the client, which often meant doing business in countries where they had limited experience and even fewer resources. Much of this is now, rightly, being scaled back, and we are talking to a number of institutions about this. In each of these cases, banks have been looking at working with outside specialists and partners.
PERE: Who is staffing the internal workout teams?
NH: A lot of banks have restructuring departments that will include staff members that were with the bank during the origination phase, as well as specialist asset managers with workout experience from other areas within the bank. A number of institutions in the UK have people with specific property, workout or legal expertise on secondment arrangements. There has been significant hiring in this area for some time, but I would not rule out a partnership with advisory firms for specialist areas.
PERE: Did the picture become clearer during last month’s EXPO REAL property show in Munich?
NH: During EXPO, Hypo Real Estate Holding, which has been nationalized, announced it had transferred assets marked at €173 billion ($239 billion) into a ‘bad bank’ as part of its restructuring. The so-called ‘bad bank’ is FMS Wertmanagement, while the remaining ‘core bank’ is known as Deutsche Pfandbriefbank and is concentrating its financing business on core property markets and long-standing clients. West LB also has formed such a bank known as the Erste Abwicklungsanstalt, or EAA. Within FMS Wertmanagement, not all €173 billion is necessarily real estate. Some of it will be corporate debt, some of it will be whole loans, some of it will be participations in real estate debt syndications and some of it will be other commercial paper. We believe they will devise a strategy whether it is a workout, sale, restructuring, hold or refinancing.
PERE: Is sentiment changing at all?
NH: The view is that interest rates are not going to go up very soon and that the real estate markets — certainly in Germany — are not going to get worse. As a result, the loan repayment schedules look solid. So why would they crystallise a loss by selling now? In fact, only about €5 billion of deals have been completed. The biggest example that has been widely reported was a sale by Credit Suisse to Lone Star, which has an in-house asset management company, Hudson Advisors. Credit Suisse is reported to have retained an equity stake in the deal and provided some mezzanine financing for the portfolio. This was probably the first transaction where an investor and a bank have established such a partnership.
PERE: Are those banks with an investment banking model more likely to outsource management?
NH: They have a greater tendency to do so, but there isn’t a great willingness by anyone to do something radical. A managed outcome is the strategy that is being pursued, in some cases with new equity partners.
PERE: How might things change?
NH: I don't believe we will see any great non-performing loan portfolio sales because of the unwillingness to take the kind of haircut that is needed to generate the high return expectations. One uncertain area is the volume of CMBS financings that are coming due over the next four years. These can only be extended for so long, and I think we will see some interesting transactions involving fresh equity and new lenders once that process is underway.