EUROPE NEWS: Teutonic wave

The potential of the nonperforming loan market in Germany alone may be enough to create its own ‘discrete asset class’. PERE Magazine September 2011 issue.

Last month’s purchase by Colony Capital of nonperforming loans (NPLs) in Germany is just part of a forthcoming wave of such deals in the country – enough to make it a discrete asset class all its own, according to experts.

Colony’s funds bought a package of NPLs with a face value of €370 million from four German banks – Eurohypo, Landesbank Hessen-Thüringen, Berlin Hyp and Archon Capital Bank. Those loans were made to one single borrower to develop properties, primarily in Berlin and Frankfurt, in the mid- to late 1990s. It was the fourth time in quick succession that Colony had purchased a package of loans in the country, the firm said. The first was a purchase of $90 million in loans from Bankaktiengesellschaft, which sold the loans in order to focus on servicing non- and sub-performing loans from other cooperative banks in Germany.

The current state of the German NPL landscape prompted one expert to say the opportunity in Germany alone was “big enough to create a discrete asset class.” Ruprecht Hellauer, a former managing partner at Frankfurt-based Lohnbach Investment Partners, pointed out that German banks hold €250 billion in commercial property loans, €50 billion of which was lent to foreign firms, and there is a further €30 billion locked up in commercial mortgage-backed securities. According to various estimates, 10 percent of the roughly €300 billion in loans will default, creating €30 billion in German commercial real estate NPLs, he explained.

The last big German NPL market occurred from 2003 to 2008, triggered by Basel II and the legacy of the German re-unification real estate boom. Still, only 20 to 30 percent of the assets traded, Hellauer noted. In contrast, between now and 2014, a huge amount of loans will mature and many borrowers will default on the principal.

“There will come a time when so many assets have to be managed that it will exceed the banks’ capacity,” Hellauer said. “Simultaneously, the value of the collateral will be deteriorating due to sub-optimal asset management. At that time, it will become attractive [for banks] to simply offload their NPLs.”