Westdeutsche IB

Having been bought by former partner West LB, the German property lender now has assets worth €21bn. It is also active as a property consultant and fund manager

Westdeutsche ImmobilienBank’s (WIB) recent move to become a wholly-owned subsidiary of WestLB is seen as an example of the group’s commitment to the property sector. Following the restructuring, with WestLB buying out its partners’ 50% stake, the division is now in charge of all property lending for the WestLB group.

WIB was formed in 1995 as an alliance between WestLB (50%), Südwestdeutsche Landesbank (25%) and Landesbank Rheinland-Pfalz (25%). The specialist property bank, with its headquarters in Mainz, was set up to service property industry clients. Conflicts of interest were avoided by limiting the geographic focus of domestic activities to regions outside the shareholder banks’ home states, but the bank also operated internationally. It now has a London branch and offices in Amsterdam, Madrid, New York and Paris.

Last year, an agreement with EU authorities over statutory guarantees of German public banks led parent company WestLB to split into a commercial bank, WestLB, and a public bank, Landesbank NRW.

WIB aims to become one of the leading property investment banks in Germany with property lending as the back bone of its activities. This includes structured finance, cash flow-based lending, and the provision of mezzanine and equity finance. The lending activities are complemented by property management and consultant services. WIB chief executive officer Jürgen Stinner says these services are seen as a way of generating lending opportunities as well as earning fee income.

WIB’s property investment banking activities are mainly geared towards meeting the financing needs of professional property customers. But the bank also provides mortgages to the public through online service ImmoBank direkt, which last year increased its new lending by 25% to €525m. WIB’s mortgage processing unit is now fully operational and is also able to process loans for third parties.

In the past eight years, the bank has increased its assets to €15.9bn. Following the takeover, WestLB will transfer property loans worth between €3.5bn to €4bn, which will bring WIB’s total assets up to €21bn.

“Given the regulatory requirements and standards we have to meet, our business volume is still too small and we are in the position to substantially expand our activities,” says Stinner.

Last year, WIB’s new lending business totalled €3.9bn. This marked a 7.1% fall over 2001. Around €2.1bn – more than half of the new loans – were written outside Germany. The US has been the main international market, accounting for 22%, followed by the UK with 10%. The first half of 2003 saw a sharp rise in new business, with new loans up by 50% to €2.3bn.

But Germany remains the largest lending market for WIB, accounting for 44.2% of its business. Domestic prospects look dim, as the German economy is in recession and a return to growth seems unlikely in the near future. Office demand is weak, but Stinner believes Munich has more chance of recovery than other German cities due to its high number of technology occupiers. But Frankfurt, where the financial industry drives the market, continues to struggle.

WIB has financed large housing companies, but Stinner says this business has not been that attractive due to the slim margins. He does see potential, however, in providing off-balance sheet finance and in underwriting residential portfolios sales.

In the US, WIB concentrates on lending for deals involving commercial properties in major cities’ central business districts. The UK is the second most important international market for the bank. Much of the lending business is focused on London, but WIB is keen to finance portfolios in other parts of the country. Stinner also expects to see opportunities to finance older shopping centres in need of refurbishment.

In the eurozone, WIB considers the Ile-de-France to offer the best prospects. Although rental growth has virtually disappeared, there is solid demand for office space. In Spain, Stinner says the Madrid market has become tougher, while in Barcelona continuing office demand will create lending opportunities for the bank. Last year WIB arranged a syndicated loan of €63.3m to finance Torre Diagonal Mar, a 14-storey city-centre building with 22,000m2 of office space and 303 parking lots. Completion is scheduled for 2004.

Elsewhere in Europe, Stinner expresses caution over the Netherlands: “Rents are declining and vacancy rates are rising. Also the prospects for economic growth look less favourable.” In central Europe WIB is looking at Warsaw, Prague and Budapest. Stinner expects the Budapest office market to show some rental growth.

In Scandinavia WIB has financed the acquisition of property portfolios with assets in different markets. Stinner points out that portfolio deals, particularly ones including cross-border investments, are a means to diversify risk.

For lending criteria, WIB is looking for equity contributions from the investor or developer. Typically, the bank would provide finance on a loan-to-value ratio of 75%. In addition, the borrower has to meet certain covenants, which are closely monitored and the financial strength of the tenants is also scrutinised. “We have started to analyse the tenants in our portfolio to avoid disproportionate exposure to any one company,” says Stinner.

WIB has set itself an ambitious profitability goal for 2005/2006, looking to earn a 15% return on equity, compared to the present 13% figure. All new loans will have to meet this returns target.

The bank has found that with less competition, margins in the German market are increasing. WIB’s margins are set at a level just below 100 basis points. In the US, margins are higher, averaging 120 to 130 basis points. Generally, the spread is larger in the US, and for first-class loans margins of 80 to 90 basis points are common, while for higher risk loans 200 to 300 can also be achieved.

Such lending practices are internationally common but come as a surprise to some German borrowers. Stiff competition among property lenders in the past allowed borrowers to negotiate favourable terms, with high loan-to-value ratios and slim margins. But German banks have tightened their lending standards in recent months, with some market observers predicting a credit crunch. Stinner does not share this view, although he admits that some developers and investors are being cut off from finance sources as they are unable to meet the banks’ lending criteria.

“But for professional property companies with a solid track record, we are able to raise mezzanine finance or even come in as equity partners,” says Stinner.

A case in point is the establishment of Aurelis Real Estate, a company with a 30.4m m2 portfolio of non-core Deutsche Bahn properties earmarked for sale, with an estimated market value of €2.5bn.

WIB’s property management and consultant services are also being restructured, with several businesses being consolidated into PortfolioInvest. This portfolio management company, set up in 1997, will manage assets worth around €5bn for foundations and other institutional investors, with WIB expecting a rise in demand as companies and institutions seek to sell their property.

The bank also owns fund managers WestInvest and WestFonds. WestInvest manages €4.5bn in two open-ended public funds, WestInvest 1 and WestInvest InterSelect. It also runs WestInvest ImmoValue, an open-ended fund for savings banks to invest their own capital, and Immobilien-Spezialfonds, managed on behalf of an insurance company.

WestFonds sponsors closed-end funds for individual German investors. Over the past 40 years the fund managers have launched 105 funds with a €2.9bn total investment value, 60 of which have been liquidated after an average 15.5-year life. WestFonds now manages 44 funds, owning 68 properties with a €1.7bn investment value.

Financial highlights 2001-2002
The bank’s new business fell 9% in 2002 but has risen again in recent months
WIBGroup			WIB Bank only
€m	2002	2001	€m	2002	2001
Total assets	16,095	16,457	New commercial property loans	3,205	3,119
Loan book	12,275	12,483	New residential mortgages	661	1,130
Shareholders’ funds	391	390	Total new business	3,866	4,249
Profit before loan provisons	34.7	34.4
Profit after tax	2.1	0.5
Source: Westdeutsche ImmobilienBank

Selected WIBtransactions
The Aurelis deal shows that WIB is still willing to lend large amounts in the domestic market if the conditions are right
Borrower	Amount €m	Property type	Deal type	Role of WIB	Term	Comments
Aurelis Real Estate	1,300	1,850 non-core Deutsche Bahn assets designated for development and/or sale	Structured finance/ syndicated loan	Joint lead arranger with WestLB and Bayerische Landesbank	10 years	WestLB, WIB and WestF Provinzial Life have majority equity position in newly established company
Standard Life	150	Pan-European office portfolio	Syndicated loan	Arranger and Joint underwriter with AHRB	7 years
MPC Münchmeyer Petersen Capital Hamburg (Millennium Tower)	252	Prime Vienna office building	Senior investment loan	Joint lead arranger with Deutsche Postbank	15 years	For account of the closed property fund Sachwert Rendite Fonds Österreich
Europolis Invest (Sienna Center)	$42.4	Prime Warsaw office building	Senior investment loan	Arranger/security agent and senior lender	10 years
Source: Westdeutsche ImmobilienBank