German authorities move to rescue Hypo Real Estate

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Germany moves to save Hypo Real Estate

To those not involved in overseas property markets the name of Hypo Real Estate is probably not familiar but it will certainly be in the news over the next few days. Hypo Real Estate is the second largest property lender in Germany and has literally fallen to its knees over the last few days.  Only last week the group was on the verge of going under when a consortium of banks stepped in with a last ditch financial package to stave off bankruptcy.

However, only a few days later the deal fell apart as the banks in question pulled out leaving the German authorities to step up and announce a $68 billion rescue package for the group to stave off a crisis in the German property sector.

Initially the government had not been overly keen to become directly involved in the rescue but when the first deal started to fall apart they literally had no choice.

This latest move comes on the back of the German government’s decision to guarantee ALL private savings deposits in the country in a vein attempt to breathe some confidence back into the finance market.  So what does the future hold for Hypo Real Estate and how will this affect the German property market?

Background

While Hypo Real Estate is the second largest player in the German property market, its origins only go back to 2003 and the real estate financing business of HypoVereinsbank.  However the group was soon playing a very prominent part in the German economy with operations which took in the likes of commercial property, infrastructure and public finance.

A quick glimpse at the 2007 report and accounts for Hypo Real Estate show that revenue was in the region of 900 million Euros, assets were calculated at 400 billion Euros and the group made a profit of some 504 million Euros – life was good at that time but it was soon to go very wrong.

German property market

The German property market is still something of an enigma to many property investors as it has looked good value for many years but has not moved ahead of late.  While much of this was and is down to the restrictive financing available in Germany, and the various local trends in the country, international interest has never been as high as you might expect.  If you mention the German property market on any forum you are sure to get a very mixed response.

If you take a closer look at the makeup of the German property market you will notice that not only has the property market been very disappointing over the last decade but prices in many areas have either stagnated or fallen in real terms.  It is also interesting to note that Germany has the lowest level of home ownership not just in Europe but the industrialised world with just 44% of the population owning their own homes.

There is some speculation that the market has fallen far enough and yields if nothing else will offer short term support once the credit crunch has run its course.  It is difficult to argue that the signs are not there for a period of sustained growth in the German property market but quite what is going to ignite the flame of demand remains to be seen.

Immediate future

When investors and the general public see Germany’s second largest property finance company in serious trouble it is difficult to find any immediate plus points for the market.  German finance is a very under developed market at the best of times and with money even tighter at the moment it seems that any substantial investment into the sector may well be some way off.

There is also the fact that the German economy is literally in recession and consumers are feeling the pinch in many ways.  While some investors and observers feel that the merger of East and West Germany is still very much at the heart of the country’s problems there is some debate as to whether this is relevant anymore.  The country is a major player in Europe, it has an economy which has the potential to recover quite sharply when confidence returns and there is a property market waiting to break out at some stage.

Like most European countries the next few months are pretty much a write-off as far as the economy goes and any sign of recovery, but will the property market catch the eye of overseas investors and locals?

The relatively depressed state of the German property market should in many ways result in a smaller fall in prices compared to other areas of Europe with rental yields far higher in comparison.  Whether this is enough to attract investors when confidence returns remains to be seen as many may be happier investing in markets such as the UK which have historically done well compared to many other areas of Europe.

Conclusion

The demise of Hypo Real Estate is a massive blow to the short term outlook for the German property market although bearing in mind the recent under performance of the local property market many are suggesting that the downside will be limited.  The figure we highlighted above with regard to the ownership of homes in Germany offers hope for the future, but what will light the flame which sees the German property market spring to life?

Many investors believe that changes in the German financial services sector could well be the spark that lights the fire, seeing mortgage finance become more readily available to both local investors and overseas investors.  The financial sector is the food of the property sector and while the sector has been starved for so long there is sure to be a healthy appetite as and when changes occur.

The German property market is one of those great mysteries of the property world with many experts suggesting it should be doing much better.  However, the market has failed to deliver for so long that many people have now given up hope.  But could this be the time to buy? When many investors are not even watching the market?

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