Bank finance to tighten further, surge of distressed sales seen

The next two years will see a surge in the sale of distressed German real estate assets both in number and transaction volumes, while banks will increasingly be willing to dispose of their distressed real estate loans, according to a survey published last week by the Distressed Real Estate Debt research centre. The survey also sees banks pursuing a much more cautious approach to lending, while demanding increased debt servicing obligations from their borrowers.

The centre is a research chair supported by Swiss-based Corestate Capital AG and the Real Estate Management Institute (REMI) of the European Business School in Wiesbaden. The latest survey results are based on responses from 50 top executives in the banking sector, representing 32 private commercial banks, state-owned banks, and mortgage credit banks, which collectively represent €5.465bn, or 65% of the German banking landscape in terms of balance sheet size.

Presenting the findings in Frankfurt last week, Corestate founder and chairman Ralph Winter commented, “It is safe to deduct from these findings that, as the volume of distressed real estate debt rises, an increasing number of real estate portfolios will be put on the market whose situation, while principally sound in real estate economic terms, may become distressed due to limited access to debt capital. This situation will cause prices to soften as the gap between core and non-core continues to widen.”

REMI founder and head, Professor Dr. Nico Rottke, said that the research revealed a strong rift in the financing landscape, with some banks stepping up the expansion of the provision of new finance to the German market, while other institutes are drastically scaling back their activities. . “There are clear signs that some of the major market players, including a number of private commercial banks, are intensifying their lending activity, and the majority of state-owned banks and credit co-operatives are expecting lending volumes to increase over the next two years.”

Dr. Rottke highlighted figures from the prestigious IW German Economy Institute in Cologne, showing that savings banks have substantially increased their exposure to commercial real estate-backed loan portfolios since the 2008 banking crisis – a period in which the commercial banks have steadily reduced their loan exposure.

Corestate AG is an opportunistic investor and asset manager mainly focused on German residential portfolios, with more than €2bn invested in the market since its founding in 2006.

Meanwhile, speaking at the Debtwire conference in Frankfurt last week, attended by REFIRE, Corestate’s Nikolai Deus von Homeyer suggested that his company viewed the Berlin market as having recently experienced “a spike in prices which we’re not sure is sustainable.” (Corestate recently sold a German residential portfolio, partly located in Berlin, for €51m, at a rental yield of 6% and an average price of €950 per sqm, “to take advantage of high demand for Germany real estate at the present time”). As somebody born and raised in the city himself, he said he’d had plenty of experience of spikes and downturns in the city’s property markets. “We would say that now is a good time to exit the Berlin market because we don’t think you’ll see the same growth as we’ve seen in the recent past.”

Deus von Homeyer said Corestate was looking closely at other German markets, particularly B- and C-locations where prices are attractive and might even be coming down a bit. He cited Hannover and Münster as B-cities which had been somewhat overlooked, but where falling prices might offer good entry points.  “In some of these locations, where sellers had a certain price in mind a year ago, they’re now coming back to us and indicating they’d be interested in a new (lower) offer… In some of the transactions in the bigger cities, we’re asking ourselves – are these likely to be the distressed deals of tomorrow? – because people are buying at cap rates far too low right now.”

Asked about Corestate’s traditional yield expectations as an opportunistic investor, Deus von Homeyer commented, “It IS difficult to find those deals which meet our return expectations of 15%-plus, but we’re expecting more banks and sellers to approach us in the near future as the situation becomes more stressed. But remember, deals which return 15% and more are those where you have to invest into a portfolio which requires a lot of work, which may need complete debt restructuring or removing junior stakeholders – it’s never a plain vanilla deal.”