NPLs return to Germany as banks sell off some assets

Non-performing loans are set to stage a come-back in Germany but it will be a trickle rather than a wave, delegates heard at Real Asset Media’s European Debt Finance & Investment briefing, which was held recently at the Corestate offices in Frankfurt and also online on the REALX.Global platform.

“Covid has been a catalyst, bringing tenants and banks under pressure,” said Oliver Platt, managing partner, Arcida Advisors. “The German market system is robust, so we are not looking at large portfolios but at around €40 billion of single assets being sold off in 2022.”

Oliver Platt, Managing Partner, Arcida Advisors

In a stricter regulatory environment, some banks are keen to clean out their books and to find solutions to their distressed assets before they reach NPL level.

“I believe the German banks will watch their default-prone NPL situations before they reach the 5% threshold and will find solutions to manage distressed assets or sell them off, so they can focus on financing solid assets,” said Platt.

If the market environment changes, construction costs go up and rental growth slows down, then there are likely to be more distressed opportunities.

“German banks have been very disciplined but may want to get rid of loans because they don’t have the capacity to deal with them,” said Martin Braun, founding partner, Nexus Capital Advisors.

There are also concerns about changes in the interest rate environment and in prices creeping up.

“The play between interest rates and inflation has become very complex and difficult to foresee and there will be some volatility,” said Assem El Alami, head of international real estate finance, Berlin Hyp.”Some asset types are under stress but I don’t think there will be a big wave of cleaning up by the banks.”

It will not be a wave because German banks are solid and robust, but “there will be opportunities here and there,” said Platt. “After all, there is no vaccination against distressed loans.”

The focus on ESG is likely to lead to more distressed assets, experts agreed, as it will not be possible to repurpose all existing buildings to make them green.

“Some will specialise in these conversions,” said Braun. “But there is a lot of work to be done as it’s around 75-85% of the market, so inevitably there will be stranded assets.”

As sustainability is on everyone’s agenda now, institutional investors will concentrate on the ESG-compliant and taxonomy-compliant parts of the market. Despite innovative solutions and technology coming to the rescue, older assets represent a challenge.

When it comes to distressed assets, “the best way forward is to find a solution with the debtor rather than go through foreclosure procedures,” said Platt. “You can tick all the ESG boxes, turn a distressed property into a green building, work to get the borrower back on his feet, help the community fulfil their urban development plans, work with local tradesmen and so on. ESG is a perfect fit for NPLs.”