Navigating the complexities of local legal requirements in Germany has made resolving the defaults both a time consuming and frustrating process. Nevertheless, our resolve in addressing these issues is absolute. We expect to start seeing results in Q2 of 2024. As promised, we plan to share any updates on the situation as soon as new information becomes available.
In the beginning of 2023 we partnered with German real estate debt servicing firm, Steinberg. We currently have four external law firms and two internal lawyers who are engaged with resolving the defaults in Germany. Members of the Estateguru management/supervisory board have also been assigned to monitor and assist with the recovery efforts.
The initial plan was to sell the entire German portfolio of non-performing loans in one transaction, but this has not yet proved possible. The market is showing signs of low liquidity and the expected discounts are high because the recovery is strongly connected to the underlying property value, which is under pressure following a significant downturn of the real estate market in Germany. Consequently, exiting the portfolio via a portfolio sale at this point in time, even if an interested buyer could be found, would not lead to a satisfactory recovery result.
Currently, 5% of the German portfolio is performing. The borrowers in these cases are looking for refinancing or to exit their projects, and continue to service their debt with interest payments as expected.
About 50% of the defaulted borrowers in Germany are in contact with our partner Steinberg as we attempt to resolve the cases through voluntary sale and refinancing etc. These borrowers understand that our legal position is strong, and are cooperating fully with these processes.
10% of the portfolio is also being handled by our partner, Steinberg, which includes looking for potential buyers for the assets or claims. In parallel, we are continuing with legal actions to secure our position in case an early exit by way of sales does not materialise.
35% of the portfolio is made up of the most problematic borrowers. These borrowers are avoiding contact or raising groundless objections to the enforcement. We have highly competent legal and debt collection partners who will not stop their work until recovery options have been exhausted. However, in regard to this part of the portfolio, we anticipate this taking at least 2 years.
There are currently 7 insolvency proceedings ongoing in different phases or being started. The process will take at least a year if there are no disputes from the borrowers’ side. No forced auctions in the court system have taken place yet as they would not be favourable to our investors due to the current real estate market situation.
We assure you that we are working on a case by case basis to develop and apply workout plans which maximise the returns of our investors. The German real estate market situation is showing signs of improvement, which should make recovering the loans somewhat less difficult.
German market update*:
- The boom ended with the start of Russia’s invasion of Ukraine and the subsequent, ongoing conflict. Some indices show a significant decline in real estate prices, while others are very restrained. In 2023 thus far, the number of transactions is very low.
- Given the current financing costs, prices would likely need to fall by about 20-40% from their peak to make the investments profitable for real estate investors.
- We only anticipate a dip in the price, however, due to the following four factors: Negative real interest rates, inflation protection through real estate, rising rental growth and most importantly a high fundamental supply shortage.
- Real estate housing prices have already experienced a sharp decline, due to the surge in inflation.
- As was to be expected, we’ve seen many properties in need of refurbishment changing hands in recent months.
- The interest rate shock is dampening new construction. The wave of refugees from Ukraine and the structurally high influx, which again exceeds 300,000 people per year, as before the pandemic, are increasing demand.
- Monetary policy is currently influenced by two arguments that provide contradictory implications, at least in the short term.
- Persistently high inflation, which suggests interest rate hikes, increases macroprudential risks in the short term.
- We have seen the interest rate peak already this year, which may signal the beginning of an increase in prices.
- Politically and socially, CO2 emissions from buildings are increasingly coming into focus. In recent quarters, we already see a divergence in prices between low and high emission buildings. The supply of energy efficient buildings is likely to remain scarce, but demand is increasing due to both regulatory requirements and increasing social significance. We expect even greater price divergence along these lines in the long term.
We have learned many hard lessons in Germany, and we are determined to improve and evolve. Recent enhancements to our credit policy are one example of our commitment to improving and strengthening our processes and our product. Justifying the continued faith of our investors is our most important priority and chief inspiration.
We appreciate how frustrating it is when loans are not repaid in a timely manner, and we share this frustration, deeply. We remain committed to seeking the optimal outcomes in each case, and confident in the resources we have at our disposal. We thank you for your patience at this time. We will update you again when there are significant developments.
If you would like to view our historical portfolio data, and recovery statistics, click here.