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    Sep 2003
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    Default German Real Estate Companies Owing EU4.2 Billion Face Deadlines

    German Real Estate Companies Owing EU4.2 Billion Face Deadlines
    By Claudia Rach

    March 3 (Bloomberg) -- Germany’s real estate companies are fighting for survival, with deadlines looming to refinance short-term debt that’s as much as 18 times their 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 euros ($5.3 billion), according to their most recent financial reports. Patrizia Immobilien AG, Vivacon AG and IVG Immobilien AG alone owe 3.1 billion euros, part of which expires as early as next month. That’s 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 Dusseldorf, Germany.
    Augsburg-based Patrizia and Hypo Real Estate Holding AG, 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 slumped even as the equity market rose.
    Toxic debt from the U.S. subprime mortgage crisis has forced banks around the world to seek bailouts. While Germany said this month that Hypo Real Estate is too important to go bankrupt, none of the top 10 listed property companies is bigger than 700 million euros in market value. The prospect of some of the companies failing is turning investors away, said Matthias Born, a fund manager at Allianz Global Investors in Frankfurt who has sold most real estate shares from his 1.2 billion-euro portfolio.
    Bank Scrutiny
    The ratio of debt to assets is one benchmark banks watch closely. A range of 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 law firm Allen & Overy LLP in Frankfurt. Seven of the 10 companies have ratios that exceed 65 percent, with Patrizia topping the list with 80 percent, according to Frank Neumann, an analyst at Bankhaus Lampe AG in Dusseldorf.
    General Growth Properties Inc., the U.S. owner of shopping malls that warned last week it may be forced into bankruptcy, is saddled with $1.18 billion in past-due debt.
    While most of the bigger U.S. real estate firms have received debt ratings, none of the top 10 German property firms are rated by Moody’s Investors Service or Standard & Poor’s. That doesn’t make it easier for the companies to raise funds, said Torsten Klingner, an analyst at SES Research in Hamburg.
    ‘Real Problem’
    Patrizia, which builds and manages residential property, has 1.3 billion euros in short-term debt, of which 530 million euros are due at the end of March. The debt level could be “a real problem” and banks could possibly force the company to sell shares or into insolvency, according to GSC’s Schrade.
    Patrizia 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 in a Feb. 20 interview.
    Munich-based Hypo Real Estate, which has received 102 billion euros in public guarantees and credit from the German government, is one of Patrizia’s largest lenders, according to Sal. Oppenheim Jr. & Cie.’s Frankfurt-based analyst Sven Janssen. Hypo Real Estate spokesman Oliver Gruss and Patrizia’s Andreas Menke won’t comment.
    Germany’s commercial property market froze in the second half of 2008 as financing dried up, said Tobias Just, a real estate economist at Deutsche Bank AG in Frankfurt. Prices will probably fall 30 percent this year from 2007, he predicts.
    Defaults Expected
    In a parliament report this month, Germany’s government singled out commercial real estate as an industry where “defaults must be expected” as the financial crisis deepens.
    TAG Immobilien AG, the property firm founded in 1882 to build a railway in Bavaria, reported a 2008 net loss yesterday 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 euros in asset value in the fourth quarter of 2008, according to SES Research’s Klingner. The company has 524.8 million euros in short-term debt and a market value of 39.3 million euros.
    A Vivacon spokesman in Cologne said the company is in “promising” talks with banks to extend its short-term debt.
    A spokesman at Bonn-based IVG, which owns offices, business parks and industrial property, declined to comment on how the company will refinance its 1.4 billion euros in short-term debt.
    Vivacon has slumped 86 percent in the past year, leading a decline in German real estate shares. IVG fell 83 percent. Patrizia lost 65 percent, cutting the company’s market value to 74 million euros, compared with its 1.3 billion euros in short- term debt.
    ‘Against the Wall’
    Still, lenders may prefer to extend loans and demand higher interest rates, Bankhaus Lampe’s Neumann said. Earlier this month, Eurocastle Investment Ltd., a property fund managed by Fortress Investment Group LLP that invests in Germany commercial real estate, extended a 236 million-euro loan after agreeing to increase interest payments by 75 basis points, or three quarters of a percent.
    Royal Bank of Scotland Group Plc, the biggest government- controlled U.K. bank, last week reported a full-year loss of 24.1 billion pounds ($33.9 billion) and said it would shift 540 billion pounds of mortgage-backed securities and other assets to a new unit. RBS owns about 22 billion pounds of real estate loans secured by properties worth less than the amount loaned, analysts at JPMorgan Cazenove Ltd wrote in a Feb. 19 note.
    “Banks can’t afford to drive real estate companies against the wall,” Neumann said. “They have other problems at the moment than to cash in real estate portfolios.”

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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