A fresh wave of non-performing loans in the wake of the COVID-19 pandemic and the economic lockdown can be expected, with commercial property loans to the forefront, according to a new study among risk managers in German lending institutions, surveyed by the BKS Bundesvereinigung Kreditankauf und Servicing and the Frankfurt School of Finance and Management.
The researchers questioned 50 lending and risk experts between the end of April and the beginning of June, with their responses feeding into a barometer reading of +1 (growing NPL market) and -1 (falling NPL market). The resulting reading of 0.42 based on prospects for the coming twelve months is, according to the BKS, “The highest ever measured, by a margin, since the launch of the NPL Barometer in 2015.”
Overall, the respondents forecast a strong increase in outstanding NPLs: from last year’s €33 billion to €45 billion by the end of this year and €59 billion by the end of 2021. The BKS estimate published a few weeks ago even speculates that the NPL volume will triple in the medium term to around €100 billion
Loans to medium-sized and small enterprises (SMEs) are particularly at risk. Here 77% of risk managers expect an increase in bad loans to rates of 2.9% (2020) and 4.39% (2021). Commercial real estate financing, for which 62% of those surveyed expect an increase in non-performing loans, also appears to be at high risk of default. The expected NPL ratios here average 2.24% (2020) and 3.5% (2021).
Defaults on residential real estate loans are not immune, and though far less, are also expected to rise. For example, 56% of the risk managers assume that the portfolio of non-performing loans in this segment will increase - albeit the expected NPL ratio of 1.43% (2020) and 1.94% (2021) is still significantly lower than for commercial real estate loans.
BSK advisory board member and head of the ‘Problemkreditmanagement’ division at Mainzer Volksbank, Thorsten Kohl, said the feared-for decline in demand for residential real estate lending had not yet materialized. "Nevertheless, the effects of the Corona crisis will also be felt in this area. The expected significant increase in corporate insolvencies will have a knock-on effect on residential real estate loans via the associated job losses and lead to an increase in non-performing loans in this area," he said.
Torsten Hollstein, CEO of advisory company CR Investment Management which specializes in loan restructuring and buying non-performing loan packages, said in a recent interview with trade publication Immobilien Zeitung that the amount of outstanding NPL in the real estate sector is set to rise significantly.
Hollstein, a veteran of several property cycles and under few illusions as to how the German market works, said that many more insolvency consultants, funds and banks were seeking out advice from his Berlin-based company. Those hardest hit, he said, were conference hotels and older shopping centres, while offices in B- and C-locations were likely to suffer most.
Hollstein said that, while a certain summer recess was still being observed, the troubled cases were piling up and will shortly need to be dealt with. He estimated the German market pre-crisis for real estate NPLs at about €30bn, with a new wave of insolvencies about to break onto the market, as soon as the statutory exemption for the obligation to file for insolvency is lifted.
“I expect an increase in NPLs in the second half of the third quarter. Rents and payments will still be suspended. The leisure sector, for example, has been particularly hard hit and is still living with the short-time working regulations (Kurzarbeit). If it were not extended, this would accelerate the possible wave of insolvencies.”
Particularly exposed, he said, were trade fair and congress hotels, for whom there is no concrete timetable at all for the resumption of larger events. “Take Expo Real, for example, which will take place on a much reduced scale. That will cause real problems in the surrounding area. By contrast, a much more positive trend is noticeable in the leisure hotel industry, while the situation is still in flux for airport hotels. They are constantly revising their forecasts to a more positive range at the moment.”
“I expect problems even in prime retail locations. Some luxury providers are already in trouble. And peripheral locations outside the local supply area and older shopping centres will also suffer.”
“However, modern local suppliers and contemporary shopping centres will recover. In the office segment, success will depend on liquidity in the cities. I therefore see some decline in the B- and C-cities, with tenant quality playing a greater role again. The classic factors of the real estate business will come to the fore, and risk will again have to be more strongly priced in.”
“While the financial crisis only hit the financial sector, the real estate sector and related groups, this time we have a more complex phenomenon: a broad-based default in tenant demand. The domino effects of such a development cannot yet be fully assessed. The same applies to whom exactly the wave of insolvencies will hit.”
Asked whether investors who had been playing loosely with risk were now paying for their sins, Hollstein said, “Definitely. Some people didn't know and didn't know any better, because they hadn't experienced any crises yet. Others took their risks with their eyes wide open - for example, certain buyers of portfolios that relied exclusively on yield compression without actively managing their holdings.”
As to banks and other lenders, he said the mezzanine and debt funds would be feeling the heat. “But all developers are also affected as leading indicators, although these represent only a fraction of participants. Others will simply hand back their keys and say: We have already made money.”
