German real estate companies fight for survival

BERLIN: German real estate companies are fighting for survival, with deadlines looming to refinance short-term debt of as much as 18 times their combined market capitalization while the recession erodes asset values.

Loans defined as short-term by the 10 largest publicly traded property companies total €4.2 billion, or $5.3 billion, according to their most recent financial reports.

Patrizia Immobilien, Vivacon and IVG Immobilien alone owe €3.1 billion, part of which expires as early as next month. That is more than five times the trio's combined market value, which has shrunk 83 percent in the past year.

"I wouldn't be surprised if banks pull the plug for some real estate companies in the very near future," said Matthias Schrade, an analyst at GSC Research in Düsseldorf.

Patrizia, based in Augsburg, and Hypo Real Estate Holding, the commercial property lender bailed out by Germany, are among stocks on Schrade's "don't touch" list. Since 2003, 11 of the 91 companies on that list have gone bankrupt and shares of 63 others have slumped even as the equity market rose.

The German finance minister, Peer Steinbrück, said Friday that the state needed to gain more than 75 percent control of Hypo Real Estate Holding to save the lender. The move would hasten Germany's first bank nationalization since the 1930s.

Given the worsening financial crisis, the government may "sooner rather than later be faced with the difficulty that the survival of the bank is seriously endangered," Steinbrück told lawmakers in Berlin. "We must make sure, by gaining a controlling majority, that the restructuring measures succeed."

Bad debt from the U.S. subprime mortgage crisis has required banks around the world to seek bailouts. While Germany has said that Hypo Real Estate was too important to go bankrupt, none of the top 10 listed property companies is bigger than €700 million in market value. The prospect of some of the companies failing is turning investors away, said Matthias Born, a fund manager in Frankfurt at Allianz Global Investors who has sold most real estate shares from his €1.2 billion portfolio.

The debt/assets ratio is one benchmark that banks watch closely. A range up to 60 percent to 65 percent is where "banks would still be willing to give credit," according to Olaf Meisen, a partner who specializes in real estate finance at the law firm Allen & Overy in Frankfurt. Seven of the 10 companies have ratios that exceed 65 percent, with Patrizia topping the list at 80 percent, according to Frank Neumann, an analyst in Düsseldorf at Bankhaus Lampe.

General Growth Properties, a U.S. owner of shopping malls that warned last week it might be forced into bankruptcy, is saddled with $1.18 billion in overdue debt.

While most of the bigger U.S. real estate companies have received debt ratings, none of the top 10 German property ones are rated by Moody's Investors Service or Standard & Poor's. That does not make it easier for the companies to raise funds, said Torsten Klingner, an analyst in Hamburg at SES Research.

Patrizia, which builds and manages residential property, has €1.3 billion in short-term debt, of which €530 million is due at the end of March. The debt level could be "a real problem," and banks could possibly require the company to sell shares or force it into insolvency, Schrade, of GSC Research, said.

Patrizia's chief operating officer, Klaus Schmitt, disputes that. "We're in talks with our banks, and there are no signs a prolongation won't work," he said during an interview last month.

Hypo Real Estate, which is based in Munich and has received €102 billion in public guarantees and credit from the German government, is one of Patrizia's largest lenders, according to Sven Janssen, an analyst in Frankfurt for Sal. Oppenheim Jr.

Spokesmen for Hypo Real Estate and Patrizia would not comment.

The commercial property market in Germany froze in the second half of 2008 as financing dried up, said Tobias Just, a real estate economist in Frankfurt at Deutsche Bank. Prices will probably fall 30 percent this year from 2007 levels, he said.

In a report to Parliament, the government singled out commercial real estate as an industry where "defaults must be expected" as the financial crisis deepens.

TAG Immobilien reported a 2008 net loss this past week after writing down the value of its assets. More may follow.

Vivacon, which specializes in leaseholds of residential property, may have to write down about €140 million in asset value in the fourth quarter of 2008, according to Klingner. The company has €524.8 million in short-term debt and a market value of €39.3 million.

A Vivacon spokesman in Cologne said the company was in "promising" talks with banks to extend its short-term debt.

A spokesman at IVG in Bonn, which owns offices, business parks and industrial property, declined to comment on how the company would refinance its €1.4 billion in short-term debt.

Still, lenders may prefer to extend loans and demand higher interest rates, Neumann said. Earlier this month, Eurocastle Investment, a property fund managed by Fortress Investment Group that invests in commercial real estate in Germany, extended a €236 million loan after agreeing to increase interest payments by 75 basis points, or three quarters of a percent.

"Banks can't afford to drive real estate companies against the wall," Neumann said.