The NPL wave investors are waiting for may already be passing

For much of the past year, the German real estate market has been waiting for a defining moment: the arrival of a large non-performing loan wave that would finally force price discovery and unlock distressed opportunities. That moment has not yet arrived. For some investors, the absence of a visible shock has reinforced the belief that stress remains manageable. For others, it has raised a more uncomfortable question: what if the restructuring is already happening, just not in the way the market expects?

Increasingly, the evidence may be pointing in that direction.

Germany is not short of stress in commercial real estate. It is short of formally recognised defaults. A growing share of loans is under economic pressure but remains classified as performing or sub-performing, sustained by maturity extensions, covenant waivers and capital structures that no longer reflect current asset values. This creates an overhang that is largely invisible in headline statistics, yet is already shaping ownership outcomes and future returns.

That gap between reported stability and underlying fragility was a central theme of a recent Drooms webinar on investing in NPL portfolios, reinforced by legal and transactional insight from Oliver Platt of law firm KUCERA, talking directly to REFIRE. Together, they point to a market that has quietly entered a restructuring phase, even as many participants continue to wait for a more dramatic reckoning.

What the data shows and what it fails to capture

On the surface, European NPL data looks reassuring. According to figures from the European Banking Authority (EBA), aggregate NPL ratios across the EU have fallen sharply over the past decade, dropping from around 7 percent to below 2 percent by 2024. Much of that progress has been driven by southern Europe, where countries such as Spain and Italy spent years forcing losses through the system, selling large portfolios and professionalising their servicing infrastructure.

Germany’s picture looks very different. Reported NPL levels have risen only modestly, encouraging the view that distress remains contained. Yet as Jan Düdden of Arcida Advisors stressed during the Drooms discussion, the EBA numbers capture only a narrow slice of real exposure.

Since the financial crisis, German banks have reduced senior loan-to-value ratios significantly. What replaced that leverage was private credit: whole-loan funds, mezzanine capital and structured instruments sitting outside the regulated banking system. This grey financing market does not appear in EBA statistics at all. As Düdden noted, headline figures for corporate real estate NPLs materially understate the volume of debt already under strain once non-bank lenders are included.

More importantly, many loans that remain classified as performing are so only because financing was locked in during the low-rate years before 2022. Asset values have adjusted downward, refinancing conditions have tightened sharply, and in many cases a sale would no longer repay the outstanding loan in full. The typical response has been to extend maturities. For many German banks, around four-fifths of current lending activity consists of prolongations rather than new risk.

These loans are not defaulted, but nor are they economically resolved. They persist in a holding pattern, sustained by time rather than by viable exit economics.

The Precursor Wave: restructuring before default

KUCERA's Oliver Platt describes what is now unfolding as an NPL Precursor Wave. Rather than waiting for loans to tip into formal non-performance, stress is being addressed earlier through restructuring, often well before regulatory triggers are breached.

Between 2019 and 2022, around €228 billion of commercial real estate loans were originated in Germany. Platt estimates that €50 to €77 billion of senior secured debt alone faces refinancing risk by 2028, driven by higher interest rates, value corrections and structural change. Once mezzanine and subordinated capital is included, the maturity wall approaches €100 billion.

Office properties in weaker locations and retail assets are particularly exposed. Loan defaults are rising, but not in a way that produces large, clean portfolio sales. Instead, Germany’s pre-insolvency restructuring regime under the Corporate Stabilisation and Restructuring Act, StaRUG, is increasingly used as leverage in negotiations.

A StaRUG process is not an NPL transaction in the regulatory sense. It applies before illiquidity occurs and is designed to prevent insolvency. In practice, however, the credible threat of a court-approved restructuring plan, including cross-class cram-down, is often sufficient to force outcomes that closely resemble classic NPL haircuts. Senior and mezzanine lenders may accept discounts once the comparison to the next-best alternative, typically foreclosure or insolvency, is made explicit.

Private equity investors are now actively financing such restructurings. They buy out lenders at discounts reflecting asset value, collateral position and downside scenarios, then step in as lenders themselves. In many cases, they also provide fresh super-senior capital to stabilise the asset and reset the capital structure. Equity is usually wiped out, although sponsors may remain involved as service developers, with upside participation once investor hurdle returns are met.

Crucially, these loans never form part of a later headline NPL wave. Like a precursor swell ahead of a larger event, they release pressure quietly upstream.

Who is positioned to profit and who may be waiting too long

This dynamic has clear implications for investors positioning themselves for distress.

Germany is unlikely to experience a single, dramatic release of NPL portfolios comparable to the early 2000s or the post-financial-crisis period. Instead, losses are being absorbed incrementally through restructurings, extensions and bilateral transactions that rarely surface in public data.

The opportunity set therefore favours highly specialised capital. As Antje Mertig of Steinberg Management explained, distressed investing requires deep due diligence, realistic cash-flow modelling and a clear strategy for gaining control. Court timelines alone can stretch to 18 or 24 months, during which financing costs continue to accrue. In many cases, transactions must be executed on an all-equity basis until assets are stabilised.

Mainstream institutional investors are poorly suited to this environment. Documentation is often incomplete, ESG data patchy, and financing for distressed acquisitions difficult to secure. Those best positioned are investors who acquire impaired loans with the explicit intention of owning, repositioning and ultimately re-leasing the underlying asset.

Project developments and secondary office assets are emerging as early pressure points. In office, the critical moment is often tenant departure. ESG requirements accelerate that risk, particularly for buildings constructed before 2010, where refurbishment costs frequently exceed what achievable rents can support.

Southern Europe offers a useful contrast. Spain has already forced losses through the system, making NPL sales a standard tool rather than an exception. Germany remains in a phase of delayed recognition. As José María Gil-Robles of lawyers DLA Piper observed, regulatory easing alone does not clear markets. Only the acceptance of realistic valuations does. And by the time that happens at scale, much of the most attractive value may already have changed hands.

REFIRE: Germany does not lack distressed debt. But what it does lack is visible distress. The NPL market is already active, but it is fragmented, legally complex and largely invisible in official statistics. That favours patient, specialist capital rather than broad institutional flows. Investors waiting for a clean, headline NPL wave risk discovering that a significant share of the opportunity has already been captured through early restructurings.

The real divide is not between performing and non-performing loans, but between investors who understand how value is already being reset quietly today and those still waiting for yesterday’s crisis to repeat itself.