Two small dental and pharmacist retirement funds funded “Canyon”, a “innovative” office project real estate In her Frankfurt Germanytoday they see a bunch of sand and a beach club in place of the building that would be completed.
Heavy remains of value are the symptom of a broader crisis in commercial real estate in Germany, where the most risky forms of funding were filled with small funds and insurance hunting in the era of negative interest rates.
According to a Bloomberg report, the “Canyon” case – a plot of land between the “neighborhood with the red lights” and the Frankfurt banking district – should have already been handed over as a modern office building. Instead, the two financiers who entered mezzanine loans (funding form “in the middle” between the classic bank loan and the equity of a business or project) and small share capital rates count tens of millions of remains and were forced to draw reserves.
The picture is not isolated: As creditors unravel the ruins of the biggest turmoil in professional real estate from the global financial crisis, a market -structured market is highlighted in multiple layers restructuring.
The same funds appear as creditors in Rene Benko’s (Signna) real estate empire, in projects organized by Cevdet Caner via Aggregate Holdings and are connected to Adler Group, but also in the emblematic project of the former Frankfurt Police Headquarters who also sought to turn into a skyscraper. In all these cases, creditors who are in danger are considered to be the steepest losses, according to Bloomberg sources.
“We are just at the top of the iceberg in terms of final losses,” says Daniel Kress, a partner at Hengeler Mueller, who has advised creditors on real estate developments. “Most structures are kept alive because some people put new money. The final account will come in two or three years. “
Versorgungswerke is a peculiarity of the German system: they were established under public law so that professionals who do not pay the general social security system to build pension savings. They are organized by state and profession and number about 90 bodies, with a few hundred millions of millions to over 1 billion euros. They are typically conservative – they go to maintain capital with low positive performance – but their rules allow up to 40% in shares and inferior loans and up to 25% in real estate.
After the 2008-09 crisis and the stricter rules in banks, private borrowing flourished. Mezzanine or inferior debt – more than priority, which is first damaged before senior bank loans – became the key “bridge” of the financial gap. When interest rates have passed on negative territory since 2014, the search for performance led many institutionalists to this piece. For several funds, it was the only realistic way to achieve their goals.
The example of 2018: The ärzteversorgung Westfalen-Lippe, the Physician Fund in northwestern Germany, informed its members that, in order to achieve an annual performance of 4%, it would have to turn to “much more complex and therefore more risky investments such as mezzanine or funding”. Traditionally covered bonds and state “papers” were no longer enough.
“The risky real estate sector has moved from bank balance sheets to other parts of the ecosystem,” notes Frank Krings, an independent non -executive member of real estate funding and former Deutsche Bank executive. “This is the first time this market architecture has been tested.”
The promise of two -digit returns and the final ‘account’
Increased loans became popular because they promised two -digit returns and, in theory, they were secured by real property. Between 2019 and 2021, investors in Germany have given about € 18.5 billion in subordinated loans. In 2020, pension funds and insurance represented about 30% of the market, according to lender FAP Group. But the flow was frozen when interest rates began to rise in 2022, exposing weaknesses to collateral and valuations.
“In some funds, the coupons offered were very attractive, even though they appeared with mezzanine shapes without real collateral,” says Andrea Spellerberg, a financial partner in law firm K&L Gates.
In Frankfurt, the CV Real Estate AG bought the “Canyon” plot in 2021. The dentist and pharmacists’ funds entered Mezzanine funding and received 10% each in the share capital of the company held by the project. By the beginning of 2024, their common share had risen to 35%. But when the work changed the owner and the restructuring proceeded, their position was drastically reduced, leaving them with little or zero value.
“Canyon” is no exception but the epitome of a market that, at the end of the cycle, was based on optimistic valuations and the assignment of critical decisions to external consultants. Many small institutions have underestimated the complexity of the structures and the negotiation power required when things get over. As restructuring proceeds and the most experienced investors impose their terms, the asymmetry of the damage becomes apparent: those who have covered the lower levels of capital are the first to write losses.
For the funds, the stakes are not only accounting remains but also to ensure future pensions based on the yields of these investments. The time when the “safe” was yielding zero is over, but the return to risk without robust collateral proves to be painful. If the warning is verified that the final account will be seen in two or three years, the German risk shift of the risk of banks to other institutions will be judged on real terms: in the efficiency of professional funds and, ultimately, in their members’ pensions.
Until then, in the corner between “neighborhood with red lights” and banks’ glass buildings, “Canyon” reminds us how quickly an ambitious “Trailblazing” promise can be turned into a pile of sand in the center of Frankfurt.