German distressed real estate debt on the rise
The amount of distressed debt in Germany’s real estate sector is set to rise modestly, largely as a result of postponed transactions in the recent past, concludes the annual “Survey on Real Estate Financing and Distressed Real Estate Debt in Germany”, carried out by private equity group Corestate Capital and the Real Estate Management Institute (REMI) of the EBS European Buisness School in Wiesbaden.
The survey also reveals that the need for yield has caused gearing ratios or LTVs to rise, at the same time that NPL discounts are also rising while the lifetimes of loans are getting shorter.
According to Thomas Landschreiber, chief investment officer at Corestate Capital at a recent press conference in Frankfurt to present the findings, “In 2012, the decision-makers we polled were expecting a major clean-up and sell-off of non-performing loans. Last year, the experts no longer diagnosed a dire need to sell, true to the maxim ‘extend and pretend.’ Now the wind has shifted again, and we expect to see distressed transactions rise slightly. But these are probably not new distressed loans, but rather transactions postponed in the past.”
The survey also focused on assessing the financing sentiment for commercial real estate from banks’ perspectives, and found that the prevailing need for yield has caused loan-to-value gearing ratios to rise even while lenders are increasingly enforcing principal repayments. But loan maturities are getting shorter.
“In sync with the increase in pro-rata financed project developments, real estate financing arrangements are generally characterised by shortened maturities and elevated risk levels,” said the survey, which is a continuation of work that Corestate Research and EBS REMI has been doing since foundation in November 2011. “We are particularly pleased to see that now, in our third research year, we are in a position to show the extent to which the market for commercial real estate financing continues to shift and has still not settled down,” said Landschreiber.
Nico Rottke, founder and professor of the EBS REMI, said this year’s survey’s findings on new business are equally interesting, while the market for real estate loans is changing rapidly at the moment. “Despite margin pressure, uncertainties in regard to the level of interest rates, Germany’s economic situation, as well as the ongoing crises in the Middle East and Ukraine, banks are raising LTV thresholds and are expecting to see a constant or indeed increased volume of new business,” he said.
This year survey respondents included 31 senior banking executives, whose institutions account for roughly 97% of all assets held by German commercial real estate finance providers.