The NPL wave that refuses to break

If you'd only watched and listened to the conference slides, you would think Germany is staring at a textbook NPL tsunami. The “maturity wall” of looming loan expiries runs to the hundreds of billions. Consultants Roland Berger puts the funding gap in German real estate at €50bn by 2028. Regulators have added the NPL backstop, forcing banks to write down bad loans on a fixed timetable. On paper, it looks like the perfect storm.

REFIRE’s lead article in this issue shows how German banks are already hardening their stance on risk. The FAP Debt Report, also covered in these pages, underlines how debt funds are preparing to step into widening gaps. But when a banker, a debt fund, an NPL servicer and a restructuring adviser sat down together at the Real Estate Finance Day in Frankfurt recently, their verdict was more nuanced: the big NPL wave has not yet arrived – and when it does, it will not look like 2010.

The panel, moderated by Carolin Glänzel of lawyers Gowling WLG, brought together Christian Kuffer, senior restructuring specialist at Hamburg Commercial Bank; Mark Fuhrmann, head of European real estate credit at Fortress Investment Group; Jascha Hofferbert, partner at Silverton; and Rita Marie Roland, partner at KPMG and head of Financial Services Real Estate Transactions.

No tsunami but a long, messy grind

Asked where the real risk sits, Kuffer did not hesitate. “In office real estate we see huge loss potential for everyone,” he said. For much of the stock, “there is simply no longer a business model… no one needs them any more as they stand there.” Older, single-use industrial sites – particularly in the automotive sector – are not far behind. With industrial production sliding, “who is supposed to go in there?” Residential, he stressed, “is a completely different topic”.

Fuhrmann agreed that the pain is not evenly distributed across the capital stack. Many banks today have financed at 60–70% loan-to-value. “If we talk about value reductions of 10–15%, that is not a problem for the banks,” he argued. “That is a problem for the investors, for the mezzanine funds, where I have a much higher pain potential.” Another hotspot is project development lending, where there is “no portfolio solution” and every case must be worked out individually.

For now, that does not translate into a flood of large NPL trades. Roland pointed out that what the market calls an “NPL portfolio” today may be nothing more than “three or four loans tested in the market”. Individual deals and “under the radar” transactions have picked up, she said, but “we definitely do not see the structured processes as we used to know them”. The old billion-euro legacy portfolios are gone; what remains is fragmented across smaller and public-sector lenders that do not run auction-style sales.

Fuhrmann was blunt: “The NPL portfolios from 15 years ago, they do not exist today.” The future-volume statistics are useful “to get motivated in the morning and go to the office”, he joked, but the cycle will be more granular this time.

Stage 2: the real pipeline

If the system is not yet awash with classic NPLs, the forward pipeline is nonetheless formidable. Hofferbert pointed to an EBA dashboard showing €470bn of Stage 2 loans on European banks’ books – exposures where risk has increased significantly but which are not yet non-performing. “Even if only 10% of that becomes Stage 3, we almost double the current NPL quota,” he said.

Silverton’s own deal flow supports the trend. What had been roughly €200m in NPL portfolios reviewed in 2023–24 has surged to €2–2.5bn in 2024–25. “That indicates the direction in which we are heading,” Hofferbert said.

Roland called Stage 2 “a very important point”, essentially “the watch list” of higher-risk credits. These are often the “half-dead” assets nobody wants to touch: 1990s offices with poor energy performance, older properties with expiring leases and no reletting strategy. “Of course they will cause problems,” she warned. Senior banks are not the ones who say, “let’s do an energetic renovation, let’s put a capex loan on it”. That is “not their craft”.

This is where new players, structures and capital will be needed. The Stage 2 pipeline, sliding slowly towards distress as leases expire and capex becomes unavoidable, is likely to define the next phase of the cycle far more than any sudden blow-up.

Regulation, culture and the limits of patience

What about the NPL backstop? Kuffer described the choice it presents as “a bit like choosing between pest or cholera”. A bank can keep loans on the books but must strengthen its capital, or it can crystallise an NPL ratio that drags down its rating. For well-provisioned, diversified institutions, the backstop is manageable. “For the banks that have not yet cleaned up so well,” he added, it will be more of an issue.

Roland was sceptical that regulation alone will unlock a wave of disposals. After the first ECB on-site inspections and the SIGNA shock, many expected “momentum is coming in”. It did not arrive. Boards still cling to internal valuations and land values: “If I have a value of 100 and the land value is more than that, no committee in the world will say ‘sell it for 60 or 70’,” she noted. Supervisors then ask why a sale was agreed below the bank’s own valuation. In many cases, “there is no courage to make a decision”, and the default remains to wait for a recovery.

Fuhrmann contrasted this with the Anglo-Saxon approach: “sell things to the highest bidder as fast as possible” and let prices fall 30–40% if necessary, then rebuild confidence from there. The German model, where banks see borrowers as customers rather than counterparties, has its own logic, he said, but it can also paralyse transactions when there is no external pressure to act. The lesson from the last crisis is that neither extreme works; the system needs “a middle ground” between fire-sale liquidation and indefinite forbearance.

Kuffer has little time for old-style “bridge to exit” structures based on blind faith in a better market two years down the line. In today’s conditions, he quipped, “this is not a bridge to exit, but a ford to exit, because it goes down even further – and I don’t see the other bank at all”. In such cases, he would rather see loans sold than extended.

Debt funds as a "professional fire brigade"

For debt funds and servicers, all of this adds up to a long opportunity set. Fuhrmann described Fortress and its peers as a “professional fire brigade” – paid to extinguish the blaze while the owners argue about who covers the damage. He pushed back against the stereotype of private equity capital demanding 20% returns and making solutions impossible. Since the last crisis, the market has become “much more professional”. There are now 10–15 serious funds competing for NPL portfolios versus just three or four in 2010. What used to be a 20% cost of capital is now closer to 8–10% unlevered once portfolio financing is in place. At those levels, investors can pay 80–90% of face value for cash-flowing assets and 70–80% for non-cash-flowing assets while still achieving target returns. For many banks, that is a more realistic benchmark than they're currently assuming.

Hofferbert highlighted a more prosaic constraint: capacity. A recent Volksbanken survey, he noted, found some institutions with as few as four to ten people in workout. After a decade in which NPL departments were allowed to atrophy, “it definitely has to be built up” again. Yet it is hard to justify the cost of specialist staff “to avoid a loss”, as Kuffer drily put it.

For now, the result is what one panellist called a “homoeopathic dose” of NPL trades, still below the threshold of public awareness. Good assets continue to find buyers. Highly distressed, complex assets are edging into the hands of those willing to take real risk at correspondingly low prices. The great flood is absent – but the pipes are under growing pressure.

For REFIRE readers, we'd say the take-home message was fairly blunt, and confirms what we're hearing from many quarters. The headline numbers on the maturity wall and the NPL backstop make good slides. The real story is slower, more granular and more labour-intensive. The next phase of Germany’s real estate distress will not be defined by one spectacular NPL auction, but by a long series of difficult decisions on half-viable assets – decisions for which many banks still lack both the systems and the staff. That, as much as valuation, is where the opportunity lies for the “professional fire brigade”.