German Real Estate (German RE) has become a closely watched and a much debated sector. A string of short-seller attacks, that began with Muddy Waters taking a short position in Corestate stock in 2019, has put a spotlight on everything from questionable governance to dubious transactions and asset valuations.

Governance concerns are of course due their weight in consideration, but there are more fundamental questions at the forefront of the credit profile of these companies, and that is our main focus of the 12 names covered in 9fin’s inaugural German Real Estate report.

Many German RE companies have seen substantial falls in their bond prices, with many now trading at distressed levels. Those with listed shares are at a significant discount to their net asset values, reflecting severe pessimism from investors over underlying real estate valuations.

There is concern over future defaults, following notable restructurings for Adler Group, Corestate and Accentro in the past year, driven by their inability to meet near term maturities..

The remainder are facing secured debt and unsecured bond maturities in the next three-years. Their ability to handle these depends on various factors including overall financial health, the suitability of their portfolios to disposals, the level of headroom available under incurrence covenants and the depth or diversity of their funding sources.

We may not see certain companies return to the European High Yield (EHY) market, opting instead to raise alternative financing and sell assets to fund redemptions. These companies were arguably opportunistic EHY entrants to begin with and are finding the HY market no longer affordable or appropriate for their business models.

Ability to raise funds elsewhere, is hampered by interest coverage covenants and much higher cost of financing, and a lack of property transactions makes valuation difficult. In addition, there is concern that companies who become increasingly forced sellers as maturities approach will not find the requisite liquidity to facilitate disposals or will have to do so at marked discounts to carrying values.

It is not all doom and gloom, however, as there are pockets of value across the market, providing potential opportunities for non-bank lenders. It is worth noting that we have already seen credit funds take control of two development assets that on paper are worth a lot more than the principal claim against which they were pledged.

9fin’s German Real Estate report outlines some of the key terminology and KPIs pertinent to real estate analysis.  We detail what has happened thus far and the current state of companies facing 2023 to 2026 maturities. The report looks at the key risks and considerations associated with management plans to address maturity walls. An explanation of why valuations have not yet troughed and our view for H2 2023 follows. The report concludes with a section covering where we see potential value.

In total, we cover 12 companies in this report, nine in EHY and three Investment Grade (IG) peers for comparison and benchmarking.

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