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Fitch Warns Of Huge Losses On Struggling European Real Estate Loans


Ratings agency Fitch is warning of dramatic falls in value for properties securing two significant real estate loans, potentially leaving lenders who thought their money was safe out of pocket. 

Fitch said that owners of bonds secured against loans to a big portfolio of German apartments and a Parisian office complex could lose some of their money. 

The report follows news that Class A bondholders in a commercial mortgage-backed securitisation transaction secured against a UK shopping centre portfolio had lost some of their capital following the sale of the assets at depressed prices. It is the first time that has happened since the wake of the Lehman Brothers collapse. 

Bonds in CMBS deals are parcelled up and sold. The Class A bonds get repaid first and are supposed to be the least risky. But such is the drop in the value of some assets that those bondholders are losing some of their capital. The buyers of riskier bonds get wiped out completely in such situations. 

In a report last month, Fitch flagged two deals in which owners of Class A bonds “may” face losses. 

In the German Haus CMBS transaction, Brookfield borrowed €318M (£270M) to buy a portfolio of 6,300 residential apartments across Germany in 2021. 

The vacancy rate on the portfolio was 48% at the end of the first quarter, up from 44%, and last year Brookfield had to put up €57M in new money to cover increased expenditures. A report to bondholders said the amount of capital spent to improve the portfolio had risen in the past three years from €76M to €134M.

Yet a report to bondholders said that in the first quarter of the year, the value of the portfolio rose from €424M to €500M. 

There are €213M of Class A bonds outstanding against the assets, which means that the value of the portfolio would have to fall by €277M for Class A bondholders to make a loss. In its report, Fitch said an interest rate hedge expires this year, meaning the interest payable on the debt will increase. If Brookfield hadn’t put up more money, the portfolio would be producing negative cash flow, Fitch said. 

The other CMBS deal Fitch highlighted was River Green Finance, Europe’s first green CMBS deal. Investor LRC used a €189M loan to buy an officer complex in Paris for €343M in 2020.

The value of the 692K SF campus has since fallen to €307M, and the loan was not repaid at maturity in January.

With €98M of Class A bonds outstanding, the value would need to fall by more than €200M for Class A bondholders to take a loss. Fitch pointed to the secondary nature of the property, the location and the creditworthiness of the tenant as mitigating factors.