Vienna shocked by royal real estate scandal

Published: January 9, 2009

The Viennese business and social world is reeling from a scandal exposed in November, involving the biggest real estate company in eastern Europe, some of the country’s top aristocracy, and a missing £450mn.

The scandal centres on Immoeast, the largest real estate company in central and eastern Europe. It has a portfolio of properties in Hungary, Poland, Romania, Ukraine, Russia and elsewhere, worth around £13bn.

The company undertook an IPO on the Vienna Stock Exchange in December 2003, raising a modest £25mn, but since then, its appetite for raising equity has been phenomenal, and it has raised around £5bn in public offerings in the last four years, including the biggest ever offerings on both the Vienna and the Warsaw Stock Exchanges. Only Russian state companies Rosneft and Sberbank have raised more on the equity markets in eastern Europe. Immoeast’s portfolio was managed by an external advisor, Constantia Privatbank, which is the largest private bank in Austria. Constantia Privatbank was majority owned by Christine de Castelbajac, wife of the Viscount de Castalbajac, and the daughter of the famous Austrian industrialist, Herbert Turnauer.

Turnauer was one of the most successful post-war businessmen in Austria. He founded an industrial empire including packaging, banking and timber. Before he died in 2000, he divided his empire among his children, giving his daughter control of Constantia Privatbank. The bank is one of the most prestigious institutions in Austrian business, with a supervisory board that includes Prince Michael of Liechtenstein as its chairman, and a balance sheet of over a billion euros.

Christine, now 64, is a photographer, and left the day-to-day running of the bank to the CEO, Karl Petrikovics. In 2003, he also set up a property company, Immoeast, where he was also CEO. Constantia Privatbank acted as external manager to Immoeast, charging it fees for transactions such as the management of its public offerings.

Igor Muller, equity analyst at Wood & Co, says: “Some investors were worried about the conflict of interest in Petrikovics’ roles at both Constantia and Immoeast, but the company was doing so well that nobody complained.”

For much of this decade, the two companies were incredibly successful. Immoeast’s portfolio of high-yielding east European property assets expanded from £170mn in 2004, to £13bn last year, and its share price grew by 120% between 2004 and the end of 2007.

Constantia Privatbank initially did very well from its relationship with Immoeast, making large profits from its advisory fees, which helped it make a return on equity of 65% in 2007. It was being lined up for sale in the first quarter of this year, with Credit Suisse and Deutsche Bank reportedly interested in bidding. The sale could have netted Christine de Castelbajac around £300mn, according to analysts.

However, in October, CEO Karl Petrikovics abruptly resigned from both Immoeast and Constantia, citing personal reasons. Shortly afterwards, it emerged the Vienna State Prosecutor was looking into financial improprieties involving the two companies.

News of the investigation caused panic among the clients of Constantia Privatbank, and led to a run on the bank. On October 17, the Austrian government had to intervene to bail it out, coordinating its actions with the five biggest Austrian banks – Unicredit’s Bank Austria, Raiffeisen Zentralbank, Erste Bank, Austrian Volksbank, and BAWAG - who together provided €400mn to buy the bank, with the state providing another €50mn.

Then, in the first week of November, the new head of Immoeast, Thomas Kleibl, held a press conference to announce that the company was missing €520mn, and asking the previous CEO, Karl Petrikovics, to tell him where the money was. In late November, Austrian police raided the offices of Immoeast, Immofinanz and Constantia Privatbank to try and find the missing money.

The money is part of a €900mn bond issue which Immoeast issued in 2007, apparently without the knowledge of its supervisory board, and that Immoeast now claims was bought by a subsidiary, IBAG. Immoeast also claims the bond was guaranteed by Constantia Packaging BV, a Dutch shell company. IBAG has since denied it bought the bond. “We still don’t know where the money is”, says a spokesperson for Immoeast. “Petrikovics has said publicly that he knows where the money is. We wish he would tell us.”

With Immoeast’s corporate governance in disarray, and the company already owing around £4bn in debt, banks are understandably unenthusiastic about providing new financing. The company is now engaged in a fire-sale of its east European property assets. At the moment, at the end of November, its share price is just 35 cents, after a high of over eight euros last year, suggesting the market is pessimistic about its future.

The investigation continues, and there are reports that Christine de Castalbajac, who has lost an estimated £500mn through the scandal, plans to sue former CEO Petrikovics. The Viscountess declined to comment. It was not possible to contact Petrikovics. The auditor of Immoeast, KPMG Austria, says it acted in full accordance with international accounting principles. For Austrians, the scandal has a strange feeling of deja vu. Last year, the second biggest east European property company, Meinl European Land, was also involved in a corporate governance scandal. The company, which also raised several billion euros in equity offerings, was also owned by a wealthy Austrian aristocrat – Julius Meinl V, the owner of Meinl Bank, one of the oldest banks in Austria.

As with Immoeast, Meinl European Land’s property assets were managed by an external advisor, Meinl Bank, with the same management and a clear conflict of interest. Meinl Bank charged Meinl European Land fees for equity advisory that were double the usual market rate.

Nonetheless, Meinl European Land’s share price rose by several hundred percent from 2002 to 2007, until it emerged last year that the company was secretly buying back its shares, without the authorization of its shareholders, and using its stellar share performance to promote other funds. The activity was not illegal, because the company was registered in Jersey and therefore didn’t have to publicly announce share buybacks. However, investors took a dim view of the share pumping, and the stock price collapsed, with Austrian retail investors losing billions of pounds. The company was taken over by Israeli firm Gazit and Citigroup unit CPI in August this year, and renamed Atrium.

Igor Muller of Wood & Co says: “It’s really taken people by surprise in Austria. It’s not just Immoeast, but Meinl and BAWAG too. It doesn’t paint a very good picture of Austrian business. If it wants to improve its reputation on the capital markets, it needs to clean up its act.”