The Germany bundestag has approved a law that will allow the Federal government to nationalise Hypo Real Estate (HRE), the Munich-based bank that had been the country’s second-largest real estate specialist lender. The bank has received capital injections and liquidity guarantees worth more than EUR102bn since October 2008.
Timo Tschammler, a managing director of international investment at real estate advisory firm DTZ, agreed with Mr Rehm’s assessment. “Nationalisation was the only realistic option for HRE. It controls 15% of the German Pfandbrief covered bond market worth €150 billion. The collapse of Hypo Real Estate would not only damage the buyers of the German Pfandbrief bonds but also the effectiveness of bonds themselves as instruments of refinancing,” says Mr Tschammler. He believes HRE’s nationalisation “will serve to encourage the flow of capital within the real estate markets once more.”
The bank was laid low partly by its public finance subsidiary Depfa, purchased in late 2007, which had high exposure to structured credit transactions that turned illiquid or impaired. As HRE did not take deposits, it relied entirely on wholesale funding, which became impossible to obtain the wake of Lehman’s fall and revelations about problems in Depfa’s credit portfolios.
J. Christopher Flowers, who runs US private equity fund JC Flowers, earlier refused to sell a 24% stake in HRE, and has warned that nationalisation will deter foreign investment in Germany. However, Klaus Grossman, a partner at law firm Reed Smith in Munich, questioned this claim. “In this critical economic situation, legal intricacies have to give room to the overall national interest,” said Mr Grossman. “I can see no serious risk to Germany’s reputation as a free and liberal marketplace that warrants investment in property: the steps taken by other "free and liberal" market places such as the US and the UK go well beyond what we are now seeing happen to the factually - and probably even legally - bankrupt HRE,” says Mr Grossman.
It is possible that JC Flowers will seek to challenge the nationalisation through the courts, as the law is applicable purely to HRE, and could conflict with the German constitution (Grundgesetz) that protects private property rights.
“However, given the Grundgesetz does allow for expropriation, albeit under narrowly defined circumstances, the German Constitutional Court may very well uphold the decision taken,” sayss Mr Grossman.
According to Mr Tschammler, HRE is now expected to scale back or eliminate the international activities of Depfa, which, although originally a German bank, was reregistered in Dublin where corporate tax rates are comparatively low. “Hypo has already had to consolidate its business model and take a more conservative approach; it will principally focus its operations around domestic mortgage lending and offer relatively lower loan-to-value ratios of 60-65%,” says Mr Tschammler.
