BERLIN - GERMAN property lender Hypo Real Estate posted on Wednesday a third-quarter net loss of 3.1 billion euros (S$5.86 billion) and said it expected more bad news by the end of the year.

The loss was much worse than expected by analysts polled by Dow Jones Newswires, who had forecast a loss of 2.2 billion euros, and HRE shares fell sharply in morning trading on the Frankfurt stock exchange.

The bank's loss 'is largely attributable to the complete write-off of approximately 2.5 billion euros of goodwill and other intangible assets recognised at Hypo Real Estate Holding that have arisen as a result of the first-time consolidation of Depfa', a German-Irish subsidiary, an HRE statement said.

Depfa was hit hard when the US investment bank Lehman Brothers declared bankruptcy in mid September.

The remaining 600 million euros in losses 'were due to various factors, including the consequences of the collapse of Lehman Brothers, the situation in Iceland, a further impairment relating to the investment in Babcock & Brown and other losses in value relating to the CDO holdings of Hypo Real Estate', the statement added.

CDOs, or collateralised debt obligations are often risky securities built from a portfolio of fixed-income assets, including high-risk, or subprime US mortgages on which borrowers have defaulted in large numbers.

The real estate specialist was caught in a liquidity squeeze which worsened after Lehman Brothers went bankrupt, and in late October it obtained 15 billion euros in state loan guarantees under a rescue plan for the banking sector.

It had already benefited from a tailor-made rescue package worked out by the government, the German central bank and private banks worth 50 billion euros, to which it should have access on Thursday.

'Hypo Real Estate is providing collateral of 60 billion euros (comprising loans and securities) to secure the liquidity facility,' it said.

Meanwhile, it has begun to restructure its activities, but the bank warned that looking ahead, 'the market environment remains difficult'.

It said that 'the costs of the 50-billion-euro liquidity facility and the restructuring will also impact on results for 2009'.

It will also face costs 'in conjunction with the necessary restructuring and repositioning of the group'.

Shares in the property lender, which is to present full provisional results on November 17, showed a loss of 6.38 per cent to 3.67 euros in morning trades on the Frankfurt stock exchange.

The DAX index was 1.11 per cent higher overall.

HRE shares have lost more than three-quarters of their value in the past three months.

The lender was swamped by debts incurred by Depfa, which it bought in October 2007, after the international financial crisis emerged with the collapse of the US market for subprime mortgages.

Depfa specialises in the financing of public works projects.

On Monday, a Munich prosecutor said that an investigation had been launched into problems at HRE, accused of misleading shareholders as it was hit by the international financial crisis.

The head of HRE Georg Funke resigned on October 7. -- AFP