Composite: Depositphotos.com, REFIRE
For three years, German real estate has been waiting for a wave of non-performing loans to break. It hasn't happened — and not because the underlying distress isn't real. According to panellists at a recent PB3C webinar on how Germany's property market is dealing with financial distress, lenders, borrowers and fund managers have found ways to resolve that distress before it ever shows up in the NPL statistics.
Oliver Platt, partner and head of real estate finance at KUCERA Rechtsanwälte, describes the phenomenon as a "Precursor-NPL wave". Banks facing loans that are not yet technically non-performing — but are heading that way — are restructuring them pre-emptively: fresh investors brought in, haircuts taken in the senior tranche, existing sponsors retained as service developers in return for a fee and a "Besserungsschein", an upside-sharing arrangement if the asset recovers. Economically, Platt argues, it is indistinguishable from an NPL transaction. The difference is that the loan never reaches the point where it is formally classified as one. "Wirtschaftlich haben wir genau den selben Effekt," he said — the economic effect is exactly the same.
The reason is increasingly regulatory rather than commercial. Under the EU's NPL backstop rules, banks must progressively increase provisions against defaulted loans over time, tying up capital that could otherwise support new lending. Platt's worked example put a €200m senior loan at 40% capital cover after four years of non-performance, rising to full cover after seven years. Faced with that prospect, lenders have a powerful incentive to intervene long before default becomes unavoidable. He cited one regional lender, Bankhaus RSA — now merging with Volksbank Rosenheim — where around 36% of the loan book is classified as non-performing, arguing that similar pressures are becoming common across smaller German lenders.
The refinancing wall explains why this matters. Platt estimates that German commercial property lending between 2019 and 2022 totalled around €228bn, with between €74bn and €86bn of senior debt alone requiring refinancing by 2028. The wider refinancing burden, he suggested, is likely to be considerably higher once mezzanine finance and debt-fund lending are taken into account. In that environment, restructuring becomes less an exceptional workout than a routine part of portfolio management.
The equity side catches up
That search for earlier solutions is reshaping the equity side of the market as well. Jan-Peter Schmidt, Bereichsvorstand for Private Markets at Fondsbörse Deutschland, said GP-led continuation vehicles and secondary-market transactions — long established in private equity — are beginning to appear regularly in German real estate, as fund investor bases split between those seeking an exit and those willing to stay in for a recovery. Inquiries on this front have risen sharply this year, he said, including one current mandate involving a roughly €200m residential portfolio, where Fondsbörse is helping structure an exit for outgoing investors alongside fresh capital for those remaining. Rather than forcing asset sales into weak markets, these structures allow investors seeking liquidity to exit while new capital enters and existing assets continue under revised ownership. Platt added that such transactions remain complex, requiring agreement over valuation, governance and lender consent, but they are becoming another mechanism through which financial stress is resolved before loans formally fail.
Alternative lenders are also changing the landscape. Platt described financing syndicates in which traditional German banks now sit alongside debt funds, some quoting margins of between 175 and 235 basis points — in certain cases below those offered by banks themselves. International lenders that initially targeted returns of more than 20% have, in some instances, established lower-return investment vehicles accepting 8-9% in order to remain active in Germany.
Schmidt argued that investors active in the secondary market are not simply waiting to buy distressed assets cheaply: transactions have frequently stalled because sellers remained anchored to historic NAV while buyers priced assets against today's financing conditions. Both sides, he said, are now finding ways to bridge that valuation gap through deferred consideration and other structured solutions.
Why waiting doesn't pay
Florian Lanz, managing director of LABORGH Investment, provided the developer's perspective. In his experience, delaying difficult decisions rarely improves outcomes. Refinancing options narrow, business plans become harder to execute and repositioning opportunities diminish over time. His message echoed Platt's central argument: early intervention preserves more value than waiting for formal distress. "Je länger man wartet, wird es definitiv nicht besser" — the longer you wait, it will definitely not get better.
The discussion ultimately suggested that Germany's expected NPL cycle has not been avoided so much as transformed. Instead of producing the wave of distressed sales many expected, refinancing pressure is being absorbed through earlier restructurings, fresh equity, continuation vehicles and operational repositioning. Increasingly, the market's response to financial stress is no longer default. It is restructuring.