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Posted by egloetzl - 6. Juli 2011

German CMBS ‘bomb’ to explode in 2014/5 – Corestate’s Winter

05 July 2011, 06:14 PM, Property Investor Europe

Real estate financing pressure in Germany is likely to reach its peak in 2014/5 and many outstanding fundings, including CMBS transactions secured against German housing, will turn into distressed situations as the financing ‘bomb’ explodes, says Ralph Winter, founder and CEO of Zurich-based private equity group Corestate Capital.
In remarks to a seminar at the Wiesbaden-based European Business School last month, posted recently on the Corestate website, Winter said replacement finance for around €9bn of Commercial Mortgage Backed Securitisations backed by German housing will be hard to find. “Most of these loans were for €300m-€400m which almost nobody is in a position to refinance these days – even loans of €500m in club or syndicate deals are scarcely feasible– and we’re talking about certain CMBS refinancings of more than €1bn,” Winter said. The main issuers were housing group Deutsche Annington, US private equity firm Fortress Investments for its German listed housing company GAGFAH, and the Foncière des Murs residential REIT controlled by France’s Foncière des Régions.
The peak of the refinancing is due next year but Winter foresees a grace period of 2-3 years after that. “Then the servicers are going to start rolling up the CMBS from the bottom end, and we’re going to see the distressed situations that can no longer be refinanced,” he said. “There’s going to be fresh pressure on the banks with higher demands for Tier 1 and Tier 2 capital, which will make refinancing of anything more difficult… Critically, many of the big German CMBS deals were poor quality assets combined with high LTVs. These are many of the deals that are going to have the highest distress factor. So, with a short grace period, the bomb is likely to explode in 2014-15.”
Corestate owns more than €2bn of German real estate including 23,000 apartments and 1,700 commercial units, generating more than €100m in rental income per annum. Winter is a former head of the German unit of US private equity group Cerberus which, together with Goldman Sachs’ Whitehall Funds, in 2004 bought the GSW housing portfolio from the city of Berlin that recently achieved a successful IPO. He said Corestate’s own investment criteria tend to be equity multipliers of 1.7 times or more, seeking 15%-16% return annually over 3-5 years. It targets special distressed situations and classic property management where it can add value, and rarely enters deals for less than a €40m equity commitment.
Winter said Corestate is looking at about €200m of distressed or partly distressed deals a week and the number has been rising steadily over the past 5-6 months. “Often these are share deals, involving write-downs, changes of sponsors, preferred equity – all of which makes the examination process that much longer,” he said. In terms of using IPOs as a means of raising finance, he noted that GSW succeeded after refinancing over €800m in debt first. “The key thing is to have critical mass, with a free float of more than €500m – such permanent fungibility is key for foreign institutional investors, and obviously we don’t have too many candidates who meet that criteria.”
Banks now demand that property owners and sponsors contribute more equity even at low LTV levels. “You can put in more equity capital to protect your original 20% equity, cash on cash, without financing but how are you going to give an adequate return to your investors to whom you’ve promised a 15% return? What we’re seeing is a sort of salami approach, where the whole asset is gradually being reduced in size, slice by slice. For example, we have a portfolio with 53% loan-to-value due for refinancing. The bank comes and says you’ve got to put in more equity capital to get the asset refinanced. They have you over a barrel because they know you’re not going to hand the keys back on an asset in which you’ve got, say, 30% equity – but if you’re already under water on an asset where you had 90% leverage, they may well refinance, rather than end up taking full ownership. This is why the situation is so perverse.” However equity for real estate remains plentiful, he said. “There are enough value-added opportunistic investors out there; there is plenty of liquidity being pumped in for a 9%-10% return to plump up the junk bond markets, which is the likely next bubble. There are hedge funds with mezzanine finance, looking to invest for 12-24 months,” Winter said. pie

PIE COMMENT: This is a very frank and straightforward analysis from Winter, who has guided Corestate well through the difficult times of the global downturn. One major move was to open an office in London in order to gain access to more international institutions than are present in the vicinity of its Zurich headquarters. The analysis bolsters our view that debt financing is now the number one challenge across European property investment.


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