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Degag’s operational model centers on acquiring aging apartment blocks with high vacancy rates, renovating and renting them out, and eventually selling the properties for profit
Investors in Degag Deutsche Grundbesitz Holding AG are facing a bleak holiday season. The Hamburg-based real estate group has announced the suspension of interest and principal repayments, impacting approximately 4,700 investors and €275 million in investments. This unexpected decision, communicated just a week before Christmas, has intensified concerns about the company’s financial stability and raised broader questions about the health of Germany’s real estate market.
According to Degag board member Bernd Klein, the payment freeze was necessitated by a failed refinancing agreement with a major credit institution late last year. Efforts to secure a successor lender or bridge financing have also fallen through, leaving the company with no immediate alternative. “This step was unavoidable,” Klein stated, emphasizing that Degag had consistently met its payment obligations in the past, including commission payments to distributors.
For months, Degag had been paying out between €2.5 and €4 million monthly. Now, these payments have been halted indefinitely. The company’s survival strategy includes negotiating interim financing and exploring partial sales of its 5,000-unit residential portfolio, concentrated in northwestern Germany between Kiel and Düsseldorf.
A business model under strain
Degag’s operational model centers on acquiring aging apartment blocks with high vacancy rates, renovating and renting them out, and eventually selling the properties for profit. This approach thrived during Germany’s property boom, but rising interest rates and market stagnation have significantly strained its viability. Klein previously described Degag as a “crisis profiteer” due to its reliance on long-term fixed-rate financing, which shielded the company from earlier rate hikes. However, the recent refinancing failure reveals vulnerabilities in its financial structure.
Degag’s use of profit participation rights as a financing mechanism has come under scrutiny. Investors were promised returns of 6-9% annually but were also exposed to significant risks. According to Klein, the payment suspension aligns with contractually agreed qualified subordination clauses designed to prevent insolvency. Legal experts warn that these provisions leave investors with limited recourse. Investor protection advocates have noted that "repayments and interest payments may be suspended if they endanger the issuer’s existence."
Stiftung Warentest, a prominent consumer advocacy group, placed Degag on its warning list in August, citing “violations of disclosure requirements” and an “opaque ownership structure” involving Liechtenstein-based holding companies. The overdue 2023 financial statements further fueled skepticism. Transparency violations have been described as a "red flag," emphasizing the need for investors to seek professional advice from qualified legal and financial specialists.
Historical turning points
Degag’s current woes trace back to a pivotal restructuring in 2021, which serves as a key inflection point connecting the company's earlier success to its current challenges. The restructuring followed a major portfolio sale to Canadian investor Brookfield, a deal celebrated at the time but one that marked the departure of founder Birger Dehne and the beginning of a more turbulent era under the new leadership of Bernd Klein. This transition set the stage for the company to face mounting difficulties in an increasingly challenging real estate market.
Entrepreneur Birger Dehne, who founded and led the company for over a decade, sold a significant portion of the portfolio to Canadian investor Brookfield in a deal valued in the hundreds of millions. While this transaction generated a net profit of €82 million for Degag Deutsche Grundbesitz AG, Dehne largely exited the business, which was rebranded as Lakonie RE. Meanwhile, Klein continued operations under the newly established Degag Deutsche Grundbesitz Holding AG, which inherited a more challenging real estate market.
Reports of financial mismanagement and lack of transparency have dogged Degag in recent months. Critics highlight delays in publishing financial statements, use of loopholes to avoid regulatory scrutiny, and questionable fundraising practices. In December 2023, a documentary titled “Three Rooms, Kitchen, Mold” spotlighted substandard conditions in some Degag properties, further tarnishing its reputation.
Investor sentiment has soured, with participation rights becoming harder to sell. A private placement series launched in 2023 with a 60-month term attracted only 17 investors out of a planned 1,000. Brokers reported sluggish uptake even before the current crisis erupted.
What lies ahead for Degag?
Degag’s immediate focus is on stabilizing its finances through property sales and interim funding. Klein has halted the issuance of new financial products and aims to transition the company to a “new product world.” However, the viability of these efforts remains uncertain. Analysts point to systemic weaknesses, including high leverage and a reliance on risky financial instruments.
Legal experts advise affected investors to consult specialists in capital investment law to explore potential claims. Insolvency proceedings may be on the horizon, and investors could seek to challenge the subordination of their claims to improve recovery prospects in such a scenario.
Degag’s troubles reflect the broader problems in Germany’s real estate market, where rising costs and tighter credit conditions are testing the resilience of even established players. The case underscores the importance of transparency, robust governance, and prudent financial management, particularly in an environment of heightened investor scrutiny. Policymakers could draw inspiration from regulatory successes in other markets, such as stricter disclosure laws in the UK or streamlined oversight frameworks in the Netherlands, to guide reforms that stabilize the sector and rebuild investor confidence.
For policymakers, the crisis serves as a warning about the risks associated with lightly regulated financial products. Strengthening disclosure requirements and closing regulatory loopholes could help protect investors and stabilize the market. Meanwhile, as investors await further developments, the need for systemic reforms has never been clearer.
