Market Update - April 2020

Apr 16, 2020

Market Update - April 2020

Market update

It now seems, that despite pressure from the U.S. and the IMF, Germany’s decision to hoard cash reserves and maintain low debt, to enable them to deal with a “worst-case scenario” has proven almost prophetic. This situation has now materialised, and the government has been well placed to aid Germany’s recovery with a substantial financial rescue package.

The German government has been typically efficient and resilient, in its management of the virus and its financial support given to its workforce. They have confounded many countries with their low death rates and stable unemployment figures.

The property development market has continued to function, albeit in a reduced capacity with external, or “dangerous” work being partially suspended during the lockdown to ensure that valuable ICU beds are kept for Covid19 patients. The lighter refurbishment end of the market, where the fund focuses its lending, has continued work, but within the strict safety guidelines issued by the government.

At time of writing, we are already starting to see some European countries entering the next phase with Austria, Denmark and Czechia already easing restrictions, with a slow and structured return to work planned over the next few months.

The German National Academy of Sciences Leopoldina recommended this week that the country could begin reducing the restrictions imposed by the government. Chancellor Angela Merkel announced that a gradual return to work would commence on the 20th April 2020.

In terms of recovery, economists are split on this, although if we refer back to 2003/04 and 2008, we can see that consumer confidence is still much higher now despite this pandemic, and coupled with the strong unemployment figures, these are 2 of the key drivers in property growth.

Liquidity Management

Although there is definitely “light at the end of the tunnel”, we are maintaining our cautious and conservative approach with a continued focus on liquidity management, in particular the following three issues:

  • reducing the number of new loans deployed
  • maintaining a higher cash reserve at the fund
  • constant analysis of borrower’s habits on repaying interest monthly

We have continued our regular discussions with the borrowers to flag any potential problems now or in the coming months.

We have had two borrowers requesting an extension for two months due to the bank refinancing taking longer than expected; this is not a credit issue. Banks are taking longer to underwrite loans, this is due to employees working from home, or the credit approval investment committees being harder to convened with a proper quorum.

We are also glad to report the majority of our borrowers are maintaining the monthly interest payments to the fund, which is a valuable additional source of monthly liquidity, and proof of the healthy financial situation of our borrowers.

We want here to emphasise, as a summary of our reassuring comments on liquidity, that the fund keeps receiving regular repayments from borrowers as expected. In the last three weeks, we have received loan repayments worth 23,1 million EURO.

Credit Portfolio Management

The Manager has focussed since the crisis started, on not only managing liquidity but also on trying to improve the loan conditions of our portfolio. We are glad to say on the new loans we are completing, we have lowered the LTV and asked for corporate or personal guarantees.

Deal flow management

As reported in the previous report, the fund maintains a healthy deal flow.

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