As readers of PropertyEU will know, we are keeping an eye on a situation mainly involving Germany but also Sweden.
In October, one of the key talking points at the Expo Real trade fair was that of developers behind small- and medium-sized projects being in trouble after recent interest rate rises.
For instance, in an interview with Kadens Capital, the founding partner said rising interest rates were causing disruption. ‘It is about where the first pressure is coming from. For us, it is developers,’ said Derek Jacobson. ‘It is those with short-term finance, and those are situations causing dislocation or indigestion.’
Arcida Advisors’ Oliver Platt, who used to be at Lone Star’s Hudson Advisors and is an expert in non-performing loans, said: ‘What we see is project development firms and midsize SMEs in Germany. Those that are not too big to fail – the smaller ones- need to get new financing. Those with projects of €20 mln to €50 mln are facing a situation in which they did formative deals, so they have to accept a certain purchase price, but it is not enough to complete the building. Now they are under water.’
As this story develops, question marks are beginning to be asked of lenders.
One investor PropertyEU spoke with said they had been contacted recently by more than one developer to see if his firm would step in to help. But the investor does not view this as an interesting ‘investment’.
The developers are often coming with over 90% loan-to-value loans based on last year’s valuations. This means essentially that they no longer have any equity in the deal, and consequently have nothing to sell.
These situations appear to be primarily coming from Germany and Sweden. But why?
Well, it is possible that these two countries were judged as having the strongest real estate markets in Europe? And is it possible that in order to make deals work, investors needed ever-higher leverage assumptions to pay the price vendors wanted?
The logical charge is that banks played ball and lent to very high LTVs going along with all kinds of assumptions, including that rents will grow to the skies. In other countries, it looks like financing structures remained more cautious.
At the end of October, Moody's issued a report on Europe's commerical property finance landscape, on page 5 of which it states Nordic banks are the most exposed to commercial real estate. Sweden had the highest CRE lending as a percentage of total equity as of 2021, followed by Denmark, Finland, and then Germany.
So, what is going to happen? Some think that based on previous experience, lenders will take some time to take the keys back as they are reluctant and not well equipped to do so. If the downturn we are in proves to be similar to others, then the new equity buyer coming in will buy from them at say 75-80% LTV. Of course, that means the equity of the former developer is wiped out, and the lender might lose 10-15% of their principal value as well.
Who knows. But what we can say for sure is this issue about debt is entering the mainstream financial press.
For example, on October 19, Bloomberg ran a piece entitled: ‘Why Sweden’s $41 billion of property debt is alarming Europe.’ The hook was the hurried sale of 40 mln shares in Castellum AB. This could be part of the same story outlined above.
For the moment, the question is how uncomfortable are lenders if they have troubled developers in Germany and Sweden on their books, and did they lose discipline?
