Market Update - March 2020

Mar 17, 2020

Market Update - March 2020


Novel Coronavirus (COVID-19) has interrupted our lives in unprecedented ways over the last two-plus weeks in the West and three months in the East. The impact on the global economy on a micro and macro level is too early to understand.

The impact on Wall Street has been profound and unmatched in terms of scope and scale. The virus has caught many in the public and private sector off guard and unprepared. In short, the hyperconnected 24hr news cycle has created hysteria, causing irrational behaviour.

We want our investors to know that we are analysing the impact and implications for our market on a constant and ongoing basis.

In the coming days and weeks, we will monitor the impacts that the virus has on the German real estate market and the greater German economy.

Liquidity Management

It is imperative to note that as a result of our procedures and credit control, we have 80% of the loans paying monthly interest. In other credit sectors, the loans are capitalised, this is not our case; this is a significant monthly source of cash inflow for the fund.

Investors know one of the critical variables the fund manages on a daily basis is liquidity since liquidity is the flow of our business. That is why the Investment committee analyses deal flow expectations for the next 1-2-3-6- and 9-months basis, together with expectations of investors subscriptions/redemptions. The team has been able to manage these needs optimally, keeping an average 10%-15% in cash at all times, which together with the natural maturities from our loans (about 7-9% of our portfolio matures each month), has allowed managing liquidity efficiently. Due to the current market conditions, the board will take a more conservative approach to cash management.

Credit Portfolio Management

We have identified the severity of the events taking place in the broader market and are positioning ourselves accordingly.

We are taking all necessary measures to reduce the potential impact of external events on our business.

The recent events make any portfolio manager more aware of credit risk. This is why our portfolio has always been positioned to withstand potential difficult times due to our low LTV ratio (54% as of the end of February) and seniority of our loans (96% of our portfolio we have a senior claim on the property). Although it is difficult to reduce even further the average LTV of our portfolio, we are taking steps to have a small impact and reduce further our LTV or get additional guarantees if possible. We will be prioritising security over yield in the coming months until we see the market has stabilised.

We are closely monitoring the demand for real estate across the markets we lend in by speaking with our borrowers and counterparts in the German market, to better adapt to future market changes.

We have looked at the most recent data to get answers:

  • The latest data of permit requests of projects, as updated as of this Friday, states no significant decline in new permit requests to develop real estate projects ( This suggests companies are still feeling comfortable to develop projects for which future demand will be available.
  • We have today 120 million of loans in the table to lend to in the next two months representing 14 different borrowers. This week we have discussed with our borrowers if they still feel confident to proceed with their projects, all of them have given a positive answer, suggesting that the final demand for the real estate assets we are lending to is still there available and healthy.
  • Credit risk is mainly focused on the execution of real estate projects, which take years to complete.
  • It is important to note that the key differentiator of our fund is that our money is not implemented for construction on a build to cost ratio, eliminating exit risks due to the lack of supply of base materials, which will delay practical completion of new projects.
  • The majority of the portfolio is focused on lighted refurbishment and acquisition finance; this allows the borrowers to take the project to a stage where long term senior financing is available. This is a critical variable to understand our fund does not participate in credit risk like traditional mezzanine or construction loans, which are long term by nature. We are short term lenders which reduces our exposure to credit risk compared to traditional lenders.

As a last comment on credit risk, in the previous four weeks, we have had four loans being repaid.

Deal flow management

Cash management and credit risk are our key concerns, and although the fund has access to 120 million worth of deal-flow expected over the next two months. We expect that 20-25% of these decisions will be delayed or cancelled, depending on the cash available at the fund and markets developments.


The fund’s focus on the German economy makes us feel comfortable. Germany’s state bank “KfW” has announced initial funds of 550 billion EURO to support the economy, this is the most significant commitment so far from any government in the world, this being ten times more than the USA has committed to. Additionally, the Bundestag rushed to approve a new law expanding the “kurzarbeit” which will allow companies to put their workers on a short-time work scheme and receive state support., which is of great assistance to companies.

The capacity of the German state has already started to be put in place to assist their companies, and as Germany’s Minister for Economic Affairs and Energy Mr Altmaier said: “This is just the start”.

To highlight the strength of the German construction market, the German construction output increased by 12% in Jan 2020 compared with Jan 2019.

Germany remains the 4th strongest economy in the world behind the USA, China and Japan.

Our Opinion

In terms of how long this virus will last, while that is not possible to predict, we are seeing the total number of daily cases in China fall into single figures and the linear graph on active cases reducing. The epicentre has now moved to Europe, particularly to Italy who have introduced draconian measures to reduce social interaction, and therefore reduce the risk of further contagion.

Following this trend, countries all over Europe -including Germany- are introducing similar measures. We are hopeful this will have a positive impact on the timeline of this virus.

Regarding the ongoing management of the fund, the board has decided to hold all internal meetings via video conferencing, to negate the risk of infection.

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