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What does this mean for the real estate sector?

No.After a weekend of shocking news from the company, Adler’s chairman of the board, Stefan Kirsten, is now talking about a fresh start. The company reported a billion-dollar loss and did not receive an accounting certificate for fiscal year 2021. In a telephone press conference on Monday, Kirsten described that Adler was about to hit the wall over the weekend. “It was a pretty tight race,” he said. Just five hours before the deadline, Adler Group released its 2021 financial statements to meet the terms of its corporate bonds.

Michele Psotta

Editor in business, responsible for the real estate section.

Adler has bonds on the market in the amount of almost € 4.5 billion that would have expired if the conditions had been breached. The company should therefore have repaid these debts early. The situation remains tense, as eagles are prevented from getting fresh money from banks and the capital market.

Impossible to heal the old degree

With the tight deadlines in the loan terms, Kristen justified the decision to release corporate data for 2021 without a certificate from the auditors instead of waiting for further, more in-depth reviews. “We finished April 30 with the past Spitz on a button,” Kirsten said and stressed, “There was an exam, we have a certified degree.” The auditing firm KPMG was unable to form an opinion, which does not mean that the financial statements are incorrect. Kirsten now wants to speak to examiners to receive an unlimited certificate again, at least for 2022. “We will no longer heal in 2021,” she said, the goal now is to achieve a stable opening balance starting January 1, 2022.

Real estate manager Kirsten was called in mid-February to clean up because Adler has been trying to build confidence in his balance sheets since October 2021, so far in vain. Previously, Kirsten was CFO of real estate giant Deutsche Annington, which later became Vonovia, who is now a member of Dax. Vonovia recently became a major shareholder of Adler through diversion to fulfill a commitment. The real estate sector is thus networked.


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For a detailed view

In the sector, the Adler case raises the question of whether this is just an isolated case or whether the spotlight is on a general economic sector in decline. Apartment prices, especially in large cities, have sometimes increased dramatically over the past decade, while rents have also risen, albeit much less than purchase prices. But the Bundesbank now warns that prices are up to 40 percent above a justified market value. In extreme cases, this would indicate that a bubble has emerged that is about to burst.

However, the prevailing view in the industry is that instead of a shock, a lower price increase than before or lower price drops are imminent. This is supported by the fact that there are quite a few apartments and that this will not change anytime soon due to skyrocketing construction prices and a lack of building land.

To put yourself under pressure

Nonetheless, the real estate sector as a whole has certainly been under pressure: this is due to the progressive increase in interest rates, which are making construction financing more expensive and favoring alternative investments. This can already be seen from the share prices of the main real estate companies: Vonovia, Deutsche Wohnen, LEG and TAG have lost more value than the main Dax stock index since the beginning of the year. Adler stock, which is listed on the S-Dax, suffered even more from internal problems and plunged up to 40 percent to under four euros temporarily on Monday following bad news of the weekend.


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For a detailed view

How does Adler’s main shareholder, Vonovia, assess the situation? The Dax Group holds 20.5 percent of Adler shares, which it had taken over from a loan through a diversion of a pledge. Vonovia does not have the general concern that valuations in the real estate sector are generally too high. After all, the selling prices are currently much higher than the values ​​that are in the books. As a result of the Ukrainian crisis, the demand for apartments has started to rise again and in general real estate groups are seeing an increase in demand. “Our baseline valuation has not changed and neither has the most recent market reaction changed our valuation,” a spokesperson for Vonovia said Monday when asked. “Our premise from the start was that there is more value in Adler than the stock market suggests, because there is a portfolio that we know very well.”

Vonovia analyzed Adler’s portfolio last October, when the real estate group secured its first purchase options on Adler. However, Vonovia is not aiming for a full acquisition, as CEO Rolf Buch reiterated at the Annual General Meeting late last week. In view of the increase in the cost of capital and the already high debts resulting from the multibillion-dollar acquisition of competitor Deutsche Wohnen, Vonovia does not intend to make any further purchases at the moment. Adler’s holding is a purely financial and relatively small investment.

Adler’s head of board, Kirsten, admitted on Monday that the subsidiary Consus Real Estate with its properties under development had been written down to a residual value of only 90 million euros and was referring to the collapse of the new business. Adler had also justified the billions in depreciation with a lower development volume and higher construction costs. According to Kirsten, construction costs are currently rising even faster than general inflation, but real estate projects can still be completed. But you have to prioritize.

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