Chat with Anke Johann and Marc Bohne from Goodwin on the Changing Landscape of Real Estate Markets, Adjustments in Sector Financing, and the Ascendancy of Joint Ventures
Written by Helmut Kipp, Frankfurt
"Bond restructuring proves distressing for investors"
The three-year-long real estate debacle has drastically reshaped the finance scene. Insurance companies, pension funds, and retirement schemes have drastically cut back on their investments, report real estate attorneys Anke Johann and Marc Bohne from law firm Goodwin. The corporate bond market—a crucial finance tool for many real estate businesses—is poised for a resurgence, although the good times are far from returning.
Restructuring Nightmare
During the era of low-interest rates, it was easy to float new bonds; however, the steep jump in interest rates from 2022 set off a finance crisis. Countless borrowers struggled to meet their obligations on time, forcing negotiations with bondholders about extensions, interest breaks, and even debt-to-equity conversions. The restructuring of Adler Group and Corestate Capital made headlines, but bondholders also suffered losses with Signa Development, Preos, Eyemaxx, Terragon, Accentro, Erwe, and ESPG—up to total write-offs.
"Restructurings are a living nightmare for bondholders," says Bohne. Many investors have been burnt by real estate bonds and are now approaching new investments with caution. It's also easier for borrowers in distress to negotiate with a handful of banks than with a horde of bondholders. Bohne's verdict from the helm of Goodwin's Frankfurt office: "Bonds are in a tight spot right now."
The Lessons from the Real Estate Financing Crisis
Johann, a specialist in advising borrowers, states that for issuers, bonds are more straightforward and speedier compared to secured financings. This bodes well for the recovery of the bond market. Already, listed real estate companies like Vonovia, TAG, Aroundtown, and Grand City Properties have issued fresh corporate bonds, and LEG Immobilien has issued a convertible bond.
The Mezzanine Market in Flux
Banks have weathered the finance crisis fairly well, according to Johann, who works in Goodwin's Munich office and previously served as Legal Counsel at Deutsche Pfandbriefbank. They have sustained minimal modifications to their lending parameters and term sheets. Mezzanine capital providers, however, have had a tough time. This market is in flux. Numerous pension funds have pulled out of high-yield subordinated financing, while debt funds specializing in specific situations are infiltrating the market, often backed by opportunistic investors akin to equity funds.
Joint Venture Structures on the Rise
Joint ventures, wherein investors collaborate with a partner to handle operational duties, have become increasingly common; these could involve revamping real estate, such as converting an office building into apartments, or specialized projects like micro-living (compact apartments) and self-storage (rental storage). "Investors are on the lookout for such specific scenarios. We are currently advising many joint venture structures," says Bohne.
A Clear Renewal on the Horizon
Real estate markets, according to the lawyers at Goodwin, display a "clear recovery." Although transactions during the crisis were primarily financed with equity, banks are starting to respond to credit inquiries again. The sub-sectors of logistics/warehousing, neighborhood retail, data centers, and self-storage are particularly in demand.
The office market, according to Bohne, remains in "strong disruption." This is also due to the precarious overall economic situation. Anglo-Saxon capital providers are not particularly interested in office investments. There is a clear shift from C- to A-locations, i.e., from peripheral to central areas, and towards quality. Despite significantly escalating rents and the substantial demand overhang, transactions in residential real estate are surprisingly scarce. This is partly due to escalating construction costs and "overzealous" regulation in the construction and, in particular, the housing sector, which is deterring foreign investors. "We see hardly any new foreign investments in the German housing real estate market," says Bohne.
Many investors have been burnt by real estate bonds and are thus hesitant about a full comeback of this financing instrument, as reflected in the insights of Goodwin partners, Anke Johann and Marc Bohne. They observe a recovery in the real estate market, with a surge in joint venture structures particularly noteworthy.
About the People: Anke Johann and Marc Bohne are partners at the US law firm Goodwin, which has been stationed in Germany since 2016 and employs over 40 lawyers there. Bohne oversees the Frankfurt office, while Johann operates at the Munich location, inaugurated in 2022. Bohne specializes mainly in the acquisition and disposal of real estate and real estate holding companies. Johann advises financial institutions and investors on financing in the real estate sector and subordinated obligations. Previously, the Pfandbrief expert worked for 21 years as Legal Counsel for Deutsche Pfandbriefbank, Babcok & Braun, and HypoVereinsbank.
Insights from Enrichment Data:
- Real Estate Market Trends: Inventory levels are on the rise, with active listings increasing by 27.5% compared to the previous year and approaching pre-pandemic levels. Home price growth is slow, tracking at approximately 3.3% year-over-year, with regional variations existing. Mortgage rates are high, causing uncertainty, though improvements in rates may stimulate spring homebuying. Many areas remain undersupplied, leaning towards a seller's market, though this can shift in regions with increased inventory.
- Sector Financing: The high mortgage rates and economic uncertainty can impact sector financing, making borrowing more costly for real estate projects and homebuyers. However, progress in mortgage rates could spur more financing and activity in the market.
- Joint Venture Structures: Joint ventures in real estate allow for resource pooling to manage risks and funding. In the current market, joint ventures might appeal as they enable shared risk management. High financing costs and market uncertainties could affect the structure and appeal of such ventures.
- Market Experiences: Legal experts in the real estate sector would need to navigate these market dynamics to advise clients effectively, possibly focusing on contract structuring, regulatory compliance, and risk management strategies for joint ventures and financing arrangements. Given the uncertainty and regional variations in the real estate market, legal experts would likely emphasize the importance of careful planning, flexible contract terms, and ongoing market monitoring to manage risks and seize opportunities as they emerge.
- Johann and Bohne, partners at Goodwin, discuss the renewal of the real estate market, featuring a surge in joint venture structures due to shared risk management.
- The steep rise in interest rates caused a financial crisis, leading to negotiations with bondholders about extensions, interest breaks, and debt-to-equity conversions.
- Investors are approaching new investments with caution due to losses incurred by real estate bonds.4.Meanwhile, banks, although weathering the finance crisis well, are starting to respond to credit inquiries again.
- Regulatory compliance, contract structuring, and risk management strategies for joint ventures and financing arrangements are crucial for legal experts navigating the market's uncertainties and regional variations.
