German Banks Face a Reckoning: Trouble Brewing in Total: $60 Billion Loan Portfolio
Savings banks and banks in Germany can no longer ignore the festering problems in the commercial real estate sector. The situation demands immediate attention, as the issue is believed to be “already an acute problem strategically unlikely to disappear anytime soon.
“We believe that this is already an acute problem, which will lead to even more problems that need to be solved in the next twelve to 18 months,” says Timur Peters, founder of the credit trading platform Debitos.
The platform recently revealed that there are currently stressed commercial real estate loans in Germany with a volume of 40 to 60 billion euros awaiting resolution. These loans, although not all classified as non-performing, suffer from the fact that the financed projects or properties are no longer
estimated.
The decline in real estate values is particularly substantiated
in the Unhelpful for example, “The Squaire” at Frankfurt Airport, whose market value has collapsed by around 40% to 517 million euros, according to a recent report by the rating agency S&P.
Many banks have delayed comprehensive valuation
corrections, opting for small, gradual adjustments. This approach
aims to avoid significant devaluations that put pressure on equity. Banks have deployed two primary strategies.
Firstly,
they have completely avoided real estate sales during this period, avoiding the devaluation
of comparable properties.
Secondly,
banks have postponed classifying loans as defaulted for as long as possible by postponing current interest payments to the
end of the loan term.
Peters anticipates larger devaluations by the end of the
year, affecting both commercial banks and savings banks. In
fact, leading savings bank institutions have already increased
their risk provisions this year due to real estate issues.
This trend presents an opportunity for Debitos, the credit trading platform founded in 2012.
While convincing
savings banks to use the platform was initially
difficult,
around 70 have recently joined the platform. With a total of 348 active
savings banks, this equates to nearly one in five institutions.
Intriguingly, much of the momentum stems not from the real estate
market but the promissory note
market. According toPeters,
most inquiries from savings banks focus on
restructuring in the promissory note market.
These loans, typically
arranged by state banks and distributed
to assure safety of investment. Nonetheless, several
promissory note_loans have required restructuring.
——-
Investors from southern Europe have long dealt with stressed loans and are now eyeing
the German market,
driven by the belief that the
local liquidity in the commercial
real estate
Market. According to Peters’ estimate, there are approximately 2000 global investors on the platform, readily available tamunt 25 billion euros in free capital.
Yet, these investors are demanding sizeable
discounts; seeking out the steepest deals. For senior secured loans where the lender retains access
to the financed property. These discounts are estimated to be between 30% and 50%.
For banks grappling with bad loans,
Debitos offers
a pathway for relief.
Still
the question is: can they afford
it?
How are German banks currently addressing the $60 billion real estate problem?
## Navigating a Storm: German Banks Face a $60 Billion Real Estate Headache
**Host:** Joining us today is [Guest Name], [Guest Title], to discuss the escalating crisis impacting German banks. Recent reports point to a massive $60 billion problem brewing in the commercial real estate sector. Can you shed some light on this situation?
**Guest:** Absolutely. It’s no secret that the German commercial real estate market is in a precarious position. As Timur Peters from the credit trading platform Debitos pointed out, this is “already an acute problem” that’s only going to intensify over the next year and a half. [1] This isn’t just about non-performing loans; it’s about a significant volume of stressed loans – anywhere between 40 to 60 billion euros – where the underlying properties are simply not worth what they were previously thought to be.[[[[[1](https://www.reuters.com/world/europe/germany-is-only-halfway-through-property-crisis-says-commerzbank-real-estate-2024-03-14/)]
**Host:**
You mention property devaluation. Can you give us a specific example?
**Guest:** Certainly. The Squaire building at Frankfurt Airport, once a symbol of prosperity, has seen its market value plummet by a staggering 40%, down to 517 million euros. This is indicative of a broader trend across the sector.[[[[[1](https://www.reuters.com/world/europe/germany-is-only-halfway-through-property-crisis-says-commerzbank-real-estate-2024-03-14/)]
**Host:**
What are banks doing to address this challenge?
**Guest:**
Many banks are resorting to a strategy of denial, hoping the problem will somehow resolve itself. Instead of acknowledging the full extent of the devaluations, they are making small, incremental adjustments to property valuations. This is done to avoid the painful reality of large write-downs that would impact their equity.
They are also hesitant to sell off properties as it could trigger a further decline in prices. This reluctance only serves to prolong the inevitable reckoning. The situation is unsustainable and demands decisive action.
**Host:**
This paints a rather bleak picture. What are the potential consequences of inaction?
**Guest:** The longer banks delay confronting the reality of the situation, the more severe the repercussions will be. We can expect to see an increase in loan defaults, further weakening the financial health of banks. This could ultimately lead to systemic risk and instability in the German financial system. It’s a ticking time bomb that needs to be defused.