What Schneider Left BehindKaren Lowry Miller
As someone who looked like a risky bet, Jurgen Schneider could have stepped straight out of Hollywood central casting. The guy swiftly parlays a small grubstake into a multibillion-dollar real estate empire. He lives in a castle, drives a bulletproof car, and sports an obvious toupee. Worse, he is regularly sued by subcontractors for not paying his bills. So when Schneider disappeared, leaving more than $3 billion in debts, you've got to wonder why no one saw it coming.
That's the question haunting executives at such giants as Deutsche Bank. But a bigger question looms: What other problems are lurking in the loan portfolios of Germany's banks?
The managers of those portfolios aren't saying. And Germany has no equivalent of Canary Wharf, the huge London development whose public struggles foreshadowed Britain's real estate bust. But the signs are accumulating that Germany may be headed for its own version of a real estate bubble--not the kind that shook Britain, Japan, or the U.S., but one with troubling implications nonetheless. Says Manfred Piontke, bank analyst at Bank Julius Bar, "[Schneider's] bankruptcy is not the last one."
NOT NORMAL. Schneider's collapse occurred as other German businesses were struggling. In January, bankruptcies of all kinds were up 22.8% from the year before in western Germany and 99.2% in eastern Germany. Such conditions don't bode well for real estate. In Frankfurt at the end of 1993, prime office space was going for $44 a month per square meter, down from $55 in 1991. In Leipzig, rents were 44% lower than in 1991.
Germany's conservative banking system is supposed to discourage overbuilding. Bank lending to commercial developers is only 2% to 3% of total lending, compared with some 12% in Britain just before the real estate crisis in 1989.
But these have not been normal times in Germany. After reunification, newly devised tax breaks for building and renovating in the eastern sector sparked a flurry of building, much of it ill-conceived. The relative freedom of some German banks to make loans also fueled the building boom. German mortgage banks cannot lend more than 50% of the market value of a property. But commercial banks are not so limited: Some lent at 80% to 120% of the market values of properties. "Why be skeptical if you have collateral for what you lend?" adds Ulrich Ramm, executive vice-president at Commerzbank, which has $76.5 million in loans to Schneider.
Yet estimating real estate values can be tricky when the rent potential of a development changes dramatically. "Very often, [the banks'] assessments did not reflect swift movements in the market," says Jeremy B. Stewardson of international property consultants Jones Lang Wootton. Bank profits in Germany could suffer this year if more developers default on loans based on the exaggerated rent potential of properties.
It's unclear how diligent the banks were in sniffing out potential problems. Schneider, for example, may have overstated the rents he expected to charge, thus qualifying for higher loans. Yet he kept getting funded. "German banks have had such a good record that it's rather embarrassing," says Matthew Czepliewicz, European bank analyst at CS First Boston in London. "You have to wonder whether Deutsche Bank knew where the ultimate liability was." Deutsche Bank, which has $700 million in loans outstanding to Schneider, accuses the contractor of fraud.
While the bankers wonder which other clients will embarrass them, the politicians are bracing for the political fallout of the Schneider affair. Chancellor Helmut Kohl has urged banks to reimburse the hundreds of subcontractors whom Schneider had not paid--a clear move to prevent thousands of layoffs during election season.
But Kohl cannot repair all the political damage in the east, where ordinary citizens are disgusted with continued inequalities and pockets of staggering unemployment. "There's a huge loss of trust," says Reinhard Buhl, a lawyer representing 200 mostly eastern building constructors, who has fought Schneider in court more than a dozen times for late payments. "They see Schneider and believe capitalist Westerners are all frauds who don't fulfill promises." Schneider's legacy could be a lot worse than some empty buildings.