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Private equity-owned German real estate bank Ariel warned there was “more to come” after one in four of its US office loans defaulted last year.
The warning highlights how the pressures are being felt in US commercial real estate outside North America, where higher interest rates have made loans more expensive and lower demand for office space weighed on valuations.
Aareal, owned by Advent International and Centrebridge Partners, and its listed German peer Deutsche Pfandbriefbank, have been particularly hard hit by their exposure to US commercial real estate. This month, Deutsche PBB shares became one of the most shorted stocks in Europe.
In the fourth quarter of 2023, Ariel increased its loan loss provisions eightfold to €179 million, compared to just €22 million in the same period the previous year.
This increase caused an unexpected hit to operating profits. In early November, the bank confirmed it was on track to achieve operating profits of at least €240 million in 2023. But on Thursday it announced a 38 percent drop in annual operating profits to €149 million.
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There was an unexpected decline in the US office market in the final weeks of the year, CEO Jochen Klosges said. “Two or three issues that we didn't previously have on our radar screen have materialized,” he said, adding that the overall situation in the US office market remains “very difficult.”
Arial said it is sitting on 1 billion euros of distressed U.S. office loans, out of a total U.S. office portfolio of 4 billion euros.
“Do we expect that more cases are yet to appear? Yes, Klosges said, adding that the lender did not believe the market was turning quickly.
He said, however, that he was confident that the expected future increase in non-performing loans would be less than 1 billion euros last year, as momentum began to slow. He added that the bank was not affected by any new defaults in the first two months of the new year.
The bank allocated 350 million euros for loan loss provisions for 2024, compared to 441 million euros last year.
Ariel said it expects profits to rebound this year, and forecast operating profits of between 250 million euros and 300 million euros. The bank's Tier 1 common equity ratio – a key measure of the strength of its balance sheet – stood at 19.4 per cent of risk-weighted assets at the end of last year, 0.1 percentage point higher than a year earlier.
