Expo Real 2008: A second milestone for property's financial crisis

By Andrea Carpenter


The 10-year anniversary of the collapse of Lehman Brothers may be in the rear-view mirror, but for the European property industry it’s also this weekend and the eve of another Expo Real that marks a second crucial milestone in its descent into the global financial crisis. 

Back in 2008, three weeks on from Lehman, the industry was preparing to head to Expo Real, the annual international real estate fair that was to begin on Monday. 

Expo was an event that had carved its time into the industry’s diary on the back of the undeniable dominance of its two major property exports: the German open-ended funds and the banks. Now, the show was going to be the stage for them both to begin their battles for survival. 

Delegates arrived in Munich on Monday to the news that the German government – led by Chancellor Angela Merkel - had strong-armed the country’s banks to agree a revised EUR50 million rescue plan for property bank Hypo Real Estate. 

Hypo was in trouble. It was one of the four biggest lenders in the market but its undoing had been less about the day-to-day lending and more about its purchase of Depfa bank in 2007 for EUR5.6 billion. 

Depfa was running a classic mismatch, financing its long-term loans for infrastructure and the public sector with short-term money from the wholesale market, which had now dried up with the credit crunch. 

That same Monday, RBS, a second major lender to the European property industry, saw one of its main corporate clients had withdrawn a multi-billion pound sum so substantial that it shook the markets and brought the bank to the brink of insolvency. Its share price almost halved to 85p over the next three weeks as the UK government scrambled to secure a rescue plan. 

With two of the property industry’ s leading lenders in desperate financial trouble, the depth of the entanglements the property industry had in the unfolding financial crisis was coming into focus. From here on, the ramifications of poor and excessive lending would filter down to borrowers, but it had also become clear that the sheer extent of that lending had made the industry complicit in the banking sector’s weakness. 

Fallout for the funds

But the banks was just the half of it. The same Sunday night that Hypo’s bailout had been agreed, Chancellor Merkel appeared on TV to reassure the German public that all their savings accounts would be guaranteed by the government but omitted to mention the German open-ended funds. In her bid to allay people’ s fears about the financial crisis, Chancellor Merkel inadvertently wreaked havoc on a EUR89 billion industry. 

Within days, the run on the funds as investors scrambled to withdraw their money and move them to products protected by the government saw six fund managers suspend redemptions on their funds. Within less than a month after Expo Real, 12 funds holding EUR34 billion – more than one-third of the sector’ s assets –  were frozen to investors. 

The freezing of funds in 2008 began a long drawn out period which saw the majority of the industry liquidated as the locked-up funds prompted the government to draw up new regulation that essentially made them less “open-ended”. A 24-month minimum holding period was put in place for all new investors, and 12 months for existing ones. With legislation now changing the very nature of the funds, many just decided not to reopen.

From 2010 onwards, 18 funds valued at around EUR37 billion liquidated. It was the end of an era. From being the underestimated investors picking up prime buildings from the early 1990s onwards, moving stealthily into most European markets, now close to half of the industry would be dismantled. For those players that survived –  Union, Deka, DWS and Commerz Real –  it was size that won out but the once-dominant industry was now far from its height of power in the mid 2000s.