Axeris Capital, a Swiss-based investment manager launched in 2022, has revealed it is raising money from international professional investors including funds and private equity groups for unfolding distress situations in German real estate.
Axeris Capital is particularly active in the area of real estate debt focussed on distressed assets and distressed debt, with an increasing focus on NPLs in the future as well as club deals, and bridge financing with terms of 6-18 months.
The company says its investor partners are particularly interested in club deals, with coming months expected to bring average devaluations of up to 30% for existing properties and 30-50% for development projects, depending on their status.
Knock-on effects of devaluations on German banks will create opportunities for re-entry into real estate markets, said Ricardo Brehme, CEO, and Julian Hartmann, COO.
Drawing a comparison between the UK and Germany, they said the UK property market was already considering rate cuts in the second half of 2024 and that forthcoming general election were a possible catalyst for beneficial tax changes.
However, the juxtaposition with Germany is obvious: 'We do not yet see similar signs of recovery in the German speaking markets, notably Germany, Austria and Switzerland. For UK investors, therefore, the delayed market cycle should offer attractive opportunities to re-enter the market.'
'Price adjustments continued in the fourth quarter of 2023. The largest increase in interest rates in more than three decades has led to a decline in housing prices and continues to drive the market correction. We see it as a tipping point in real estate finance and we believe that the equity value of many of the properties currently financed by large developers has become questionable.'
For commercial property, prices have declined by 12.1% year on year, and by 4.9% quarter on quarter in the final quarter of 2023, both of which are the largest price drops ever recorded according to an index for commercial property compiled by the Association of German Pfandbrief Banks.
This represents a decline of 16.5% since prices reached a high in the second quarter of 2022, following an increase of around 55% between 2010 and 2022. On top of this, demand for offices remains subdued due to the uncertain economic growth in Germany and the still unclear impact of the working from home trend on office space needed. At the end of the past year, German office properties only accounted for just under 17% of the total transaction volume, compared with an average of 33% over the past five years. In absolute figures, investments in the asset class totalled €5.2 bn in 2023, according to JLL.
'So, the price squeeze is on,' said the Axeris professionals. 'Given the ongoing weakness in the real estate markets, we expect that the previous reluctance to take write-downs will change as soon as auditors review the financial statements and take write-downs. This will have a knock-on effect on banks, especially as the first banks start to take write-downs. For the previous lenders, this means: They will have to realise losses. But we also see this as an opportunity. This is because realistic market prices will have to return to the financiers' books. In our view, this development may be painful, but it serves to clean up the market.'
The recent news of the insolvency of Signa Holding is of particular interest, they added.
They continued: 'The commercial segment will be more affected than the residential segment. The spotlight is on office properties, as their returns have thus far generally failed to meet investors’ expectations. The biggest losers will be equity and junior debt investors. They will be wiped out first. However, once the devaluation has taken place, the way for refinancing is only cleared when borrowers and banks jointly look for solutions. We expect the importance of non-bank real estate finance to grow strongly.'
'After managing the NPL workouts in the aftermath of the global financial crisis, banks in Germany have significantly reduced most of their specialised workout teams. As a result, they lack the key skills to take effective operational control. For this reason, as well as for regulatory reasons, alternative finance providers with expertise in the restructuring and sale of distressed debt and direct real estate investments, including distressed developments, will be critical in managing this transition.'
'In this scenario, experienced investors familiar with workouts will gain momentum before local investors step in and take over due to the resilience of the German property market.'
