EstateGuru has shared the latest information on the German portfolio, and their recovery efforts in the market.
Navigating the complexities of local legal requirements in Germany has “made resolving the defaults both a time consuming and frustrating process,” according to a blog post by EstateGuru.
Nevertheless, their resolve in addressing these issues is “absolute,” EstateGuru claims while noting that they expect “to start seeing results in Q2 of 2024.”
In the beginning of 2023 EstateGuru had partnered with German real estate debt servicing firm, Steinberg.
They 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 their legal position “is strong, and are cooperating fully with these processes.”
As noted in the update, 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, they are continuing with legal actions “to secure their position in case an early exit by way of sales does not materialize.”
As mentioned in a blog post by EstateGuru, 35% of the portfolio is “made up of the most problematic borrowers.”
These borrowers are avoiding contact or “raising groundless objections to the enforcement.”
EstateGuru claims they 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, they anticipate this “taking at least 2 years.”
As noted in the update, 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 favorable to investors due to the current real estate market situation.”
EstateGuru says they assure clients that they are “working on a case by case basis to develop and apply workout plans which maximize the returns of our investors.”
According to the firm, the German real estate market situation is “showing signs of improvement, which should make recovering the loans somewhat less difficult.”
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.”
EstateGuru says they 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, they’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.”
They have seen the interest rate peak already this year, which “may signal the beginning of an increase in prices.”