German NPL: CORPUS SIREO expects asset management market potential from non-performing real estate loans to exceed two billion euros.

– Real estate lenders are expanding new business while NPL reduction is making slow progress

– Investors inside and outside German continue to show strong interest in German commercial real estate loans, yet NPL trading volume remains comparatively low

– Regulatory pressure makes increase in NPL trading volume likely

In the next two years, CORPUS SIREO expects non-performing loans to generate a market potential in real estate asset management services worth far more than two billion Euros in Germany. This is the upshot of a recent in-house market analyses conducted by Germany's leading real estate asset manager.

Commercial real estate financing in Germany currently adds up to a sum total of somewhere between 250 to 300 billion euros. A large share thereof represents classic bank financing, and about one tenth has been securitised in the form of CBMS. Given the sheer volume of the loans coming up for refinancing, the redemption of non-performing loans remains difficult despite the favourable interest environment and despite the steady recovery of the real estate markets. Then again, the buoyant climate on the investment market increasingly provides opportunities for selling assets at prices that are acceptable for the financing banks and credit servicers.

Tim Brückner, Client Group Leader Financial Institutions at CORPUS SIREO Asset Management Commercial, commented: "We expect to see sustained pressure on banks and servicers to find solutions for non-performing commercial real estate financings, and a persistently high potential for asset management services."

According to a market analysis conducted by EBS Remi, market players put the share of non-performing commercial real estate loans at around ten percent, which would be the equivalent of approx. 25 to 30 billion euros. When asked about solutions for distressed loans, more than one in three bank insiders stated their intention to bring third-party asset managers in or else to sell the non-performing loans, the EBS analysis suggests. If you assume a realisation rate of only 20 percent, you would still get a loan volume of more than two billion euros prospectively in need of a new asset manager.

Euros by Lionel Allorge

Euros by Lionel Allorge

These assumptions are backed by a number of reasons that financial service providers cite to argue in favour of jettisoning distressed loans. On the one hand, the cost pressure and the pressure on margins, the tightening regulatory requirements, as well as the inferior refinancing terms connected to the poor ratings that result from high NPL holdings, all have increased the willingness to sell. On the other hand, however, the auspicious development of the real estate market – even outside the metro regions – and the lower discounts on the book values have made it easier to retail properties, and to clean up the bank balance sheets.

"The coming months will give us a clearer picture of the dominant factors. Especially regulatory pressure could trigger a rise in the volume of NPL traded," said Brückner.

Ingo Hartlief, CEO of CORPUS SIREO Asset Management GmbH said: "Banks reduce commercial real estate NPL on the back of strong investment markets. The properties behind such loans are usually not prime assets, but management intensive properties well away from the metropolises. Successful asset management and sales activities require local market knowhow – available at the large, experienced providers of real estate asset management services in Germany. We expect an increasing market for real estate asset management services."

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