The gloomy real estate outlook that has been crystallising over the past few weeks in Germany may find itself playing into the hands of Nexum Capital and Arcida Advisors, who recently launched a new debt fund with a target volume of €250m, aimed at distressed and special situations.
REFIRE spoke recently with the team at Arcida Advisors and with Douglas Edwards, CEO of Nexum Capital, about the new vehicle, Nexum Tor Funds 1. The Luxembourg-domiciled fund is offering international institutional investors access to situations where stranded real estate with value-add potential exists, along with non-performing loans (NPLs), sub-performing loans (SPLs) and other pressured situations.
The target market is the DACH region, with a planned average investment of €20m to €50m per transaction, which can include existing assets or development projects. The fund is structured to make it attractive to insurance companies, pension funds, family offices and perhaps even banks themselves.
As storm clouds gather across the industry, with developers increasingly flummoxed by surging costs and contract commitments, Nexum CEO Edwards pointed to the biggest pressure points. "Due to increasing regulation, the COVID-19 pandemic, looming stagflation and high demand for ESG-compliant products we expect multiple investment opportunities. The real estate distressed debt market offers great potential in the form of management-intensive assets as well as debt and special situation workouts."
Arcida managing partner Oliver Platt added: "We're enabling professional investors to participate in this growth market. International investors, in particular, have not yet fully recognised the market potential in Germany, Austria and Switzerland. At the same time, we're acting as a partner to banks and other financial service providers as they seek to wind down their NPL and SPL portfolios. Our team has the necessary real estate, capital markets and restructuring know-how to maintain and grow real estate asset values even in challenging situations."
Not to put too fine a point on it, Platt says the market is now on high alert for fresh troubled situations. "Next year, by the latest, we'll start to see the first real re-development cases."
Michael Anter, Platt's board colleague at Arcida, points to the significance of the recent increase in valuations being commissioned across the industry. "There are currently many more properties being valued in portfolios than last year. If it turns out that there is a problem looming, they will try to sell. The owners still have control in this process. But as soon as it becomes clear that the value of the property has already fallen and the financing is about to expire, lenders will start thinking about exiting. That's where we see ourselves having a role to play."
Arcida is clearly well tuned in to situations where, for example, mezzanine providers who've been working with undercapitalised developers with cash flow problems, or where state Corona support is about to run out, particularly in the retail and hospitality industries, are about to run aground. They may have been betting on steadily rising prices to exit with a good profit, and now find their best exit is to sell on at a loss, given that the prospects of rising prices now, over the mezzanine funds' usual short-term time horizon, are looking slimmer.
Last year, at the time of the Expo Real in Munich in October 2021, when REFIRE first sat down with Arcida to discuss their new business, the autumn NPL Barometer of the BKS (Bundesvereinigung Kreditankauf and Servicing) showed risk managers at German banks putting their bad debt provision at 2.4% for 2021, rising to 2.6% for 2022. This was before the rise in interest rates, and the Russian invasion of Ukraine was on nobody's radar.
Arcida's Platt believes that this should now realistically be put at 5%, and perhaps even higher in the case of real estate loans, with the banks' earlier reluctance to hive off poorly-performing loan portfolios giving way to a more pragmatic approach, prompted not least by their own stricter internal regulations.
These regulations are coming from both the European Central Bank, who has asked banks to dry-test their resilience to the effects of the war in Ukraine, and financial watchdog BaFin, which is demanding higher puffer reserves from the banks against their real estate lending. If they don't part with some of their badly-performing loan portfolios, their new reserve ratios could prevent them making new loans, and hence no new earnings. From the EU there are also new regulations in the pipeline to stimulate the market for NPLs and SPLs, and get many more of them cleared through the system. The market for NPL sales has largely been stagnant since 2008.
Nexum and Arcida are at pains to point out that, although they are confident that the macro-economic climate itself will encourage banks and other lenders to take a realistic attitude to their NPL and SPL portfolios, and shifting more of them off their books, their new debt fund will not be offering unrealistic returns to potential investors, as was often the case in the early-2000s, when the market attracted a high number of cowboys in what often resembled a Wild West atmosphere.
Platt says: "The approach today is different today to twenty years ago. It is important for us to find a solution together with the debtor and the bank and at the same time make a reasonable deal with the fund. This also helps to take away the banks' fear of reputational damage, because perhaps the impression was created that they have been "too hard" on their clients, an impression they really want to avoid.
Nor does that earlier more aggressive approach sit easily with the EU's requirements in their Credit Service Providers and Purchasers Directive. This requires that in future the relationship with borrowers must be free of harassment, coercion and undue influence. Reasonable leniency must also be granted in deciding whether to initiate foreclosure proceedings. Any infringement of these 'guidelines' could be subject to severe sanctions, Platt points out.
Still, the fund is targeting an IRR return of 12%, with an equity capital multiplier of 1.5%, while recognising that it will also have to inject capital into managing certain assets to ESG-compliance. But for institutional investors, their investment is treated as a private equity transaction, which gives investors more flexibility than with direct property investment.
