Hypo Real Estate, the mortgage bank that will be spun off by HVB next month, yesterday agreed to buy a Ã¢âÂ¬4.6bn ($5.3bn) US property portfolio from its parent as it prepares to convince investors that it is shifting away from its difficult domestic market.
The lender says its German portfolio, which makes up the bulk of its its loans, is non-core and it plans to reduce it by 2007. It also plans to expand its international business to reduce its historic dependency on the German market.
Even after yesterdayÃÂ´s deal - which Hypo expects to complete by the end of the year - German loans will make up 66 per cent of its loan portfolio, 10 per cent of which it considers at risk.
Hypo plans to reduce its exposure to Germany by beefing up its presence in the UK and the US, which currently account for 12 and 6 per cent of its total Ã¢âÂ¬129.1bn portfolio.
Eventually, Germany, the UK and the US would each account for 20 per cent of the total.
Hypo also plans to exit all German state finance loans, which account for 48 per cent of its German portfolio, because they are not central to its business.
HVB will provide the mortgage bank with Ã¢âÂ¬590m of risk guarantees against non-performing German loans to ensure the spin-off does not suffer from bad loans made by its former parent.
'There was a huge conflict of interest between HVB and us,' said Georg Funke, chairman of Hypo Real Estate. 'We know they have a high risk profile and had long discussions to make sure none of the bad German real estate loans came with us.'
Hypo sees geographic diversification as the key to minimising risk. 'This business model does not rise and fall with real estate markets, but also works well in down markets,' Mr Funke said.