Not deterred by official clampdowns on lending to Chinese property projects, Hypo Real Estate Bank International opened its first Hong Kong branch this week, having received its restricted wholesale banking license. The branch is being run by Gerhard Hinterhauaser with 22 other staff. Hong Kong is the second Asian branch to be opened this year, after the bank opened an office in Tokyo in July.
The Hong Kong branch will focus squarely on sourcing mainland China property deals to which the bank can lend. "The bank's opening in China is driven by our future view of a continuously growing economy and continuously growing importance of real estate in that economy," says Juergen Fenk, managing director of Hypo Real Estate Bank International. "It is a long term strategy to be in China and we want to enter at an early stage; early enough to participate in the learning curve and participate in bringing in best practice.
"Real estate is one of the main pillars of the Chinese economy. The urban population is increasing already and it's a trend that should continue into the future. This will therefore continue into the future, mainly in residential first but then in a shift into retail and then office. We just see a huge potential in the market."
The bank is looking to mainly lend from its balance sheet directly to deals on a non-recourse basis. According to Fenk, it's not driven by relationships with particular developers, but rather is very much transaction focused. "Each transaction must be profitable in itself and must have risk return profiles that correspond to the bank's overall strategy," he adds.
Although the bank has a developed capital markets team in Europe and the US, off balance sheet securitizations are not going to be the mainstay of the bank's activities. Rather, with a tier one capital ratio of nearly 10% it is looking to expand its own portfolio.
Moreover, in markets like China, Fenk believes that flexibility is key. "It is important to be flexible in our loans to our customers and securitization is not as flexible when it comes to deals like portfolio transactions."
Still, the debut of the Hong Kong office comes at an interesting time for the bank, which was 100% spun off from its previous parent HypoVereins Bank in October 2003. The property sector lending restrictions imposed by the Chinese authorities this year are both an opportunity and a threat. Fenk thinks that while these measures will push some of the smaller developers out of business and thus hurt the market overall, it also means that there will be less competition among the banks for the high-end projects that the bank is aiming to do. The bank has already completed one loan this year, a $35 million project deal with China Vanke, one of China's leading property developers.
The expansion in Asia comes as Hypo starts to increase the size and scope of its business. "Until now we were only active in the US and Europe," says Fenk. "We have a comfortable equity situation in our bank and can invest and do more as a lender. But we have a business model that is only dedicated to real estate and so we are always looking for new markets so we can expand our geographical presence. Also we want to take advantage of different cycles... there is some convergence of cycles in Europe but there are different ones between Asia, Europe and the US and between different products: office, residential and retail. Asia was a logical stop for us in becoming a global player."
Going into China will test the bank and its enviable credit record. According to Fenk, the bank and its forebears have not had one real estate deal go bad on them in 15 years. He puts this down to a strong risk management culture and a pure focus on the property sector.
