Skeletons in the sky (and maybe in the closet)
I’m writing this newsletter from my living room which looks out over southern Berlin. It is a beautiful view that contains very little I could object to. Situated just outside the inner city, my neighbourhood was largely spared both the destruction of the Second World War and the awful mid-century architecture that plugged the subsequent gaps.
There is however one unavoidable blotch on this pleasant scene.
I say unavoidable because it is 120 metres in height, consists almost entirely of concrete and, for several years now, has been clad in scaffolding. On top, a crane swings in the wind, giving the impression that something akin to progress is taking place on this unsightly behemoth.
But that is an illusion. Nothing of note has happened at the Steglitzer Kreisel for years. It is perhaps Germany’s most famous Bauruine. Once a 1960s administrative building, it is now a half-finished luxury apartment complex left to loom over its neighbours since the investors who took it over ran out of cash.
Allegedly, the Steglitzer Kreisel will be finished one day. Its owner - the Adler Group - originally said it would finish the renovation by 2018. But the company has recently given up even setting a completion date.
Behind the scenes, the Luxembourg-based real estate firm, which narrowly avoided bankruptcy earlier this year, is rumoured to be looking to sell the half-abandoned build. Where that will leave the people who already bought the luxury apartments inside is anyone’s guess.
If they will find a buyer at all is far from certain. These aren’t good times to sell off vastly ambitious construction projects.
Ever since the European Central Bank (ECB) started hiking its interest rates last year, property developers who built their empires on cheap debt have found their business models tripped up.
Or, to put it another way, the Adler Group isn’t the only German property firm that’s desperately trying to sell off parts of its portfolio.
One name that would have once been touted as a potential buyer is René Benko, the high-rolling Austrian investor with stakes in the Daimler Building in New York, Selfridges of London and our own KaDeWe.
But Benko’s business empire - which contains over a thousand companies - is on the point of collapse after his holding firm - Signa Holdings - filed for bankruptcy in Vienna last week under the burden of €5 billion in debt.
The 46-year-old, who bears with an uncanny resemblance to fictional TV businessman David Brent, made his millions buying up prime real estate in the wake of the financial crisis of 2008, when central banks successively dropped interest rates to zero.
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In the process he bought up sites in the centre of most major German cities.
But, last year’s rate hikes brought his empire crashing down. Benko’s debts have suddenly become much larger; he could no longer find the money to pay €500 million owed to investors by the end of this year.
Since late November, construction on his sites across Germany has stopped.
Most spectacularly, the future of the Elbtower in Hamburg’s harbour district now hangs in the balance. At a planned height of 245 metres, the structure was supposed to become Germany’s third tallest skyscraper. But only half of it has been erected so far.
New investors will now have to be found. But, again, there are question marks over whether any investor has the metal to take on such a huge project in such uncertain times.
Benko’s construction projects are just a small part of the problem. His bankruptcy could ring the death knell for the department store chain Galeria, which he also owns, and thus create further Bauruinen bang in the centre of many inner cities.
In one of the more novel workings in his business empire, Benko bought both the retail business Galeria (formerly Karstadt) as well as many of the buildings the stores were housed in. Retail and properties were split into separate companies, with the former paying huge rents to the latter.
Like many high street chains, Galeria isn’t remotely profitable. Far from it, it has filed for bankruptcy twice in recent years. But the high rents drove up the value of the Benko’s property portfolio, making it easier for him to find new investors and thus buy more property.
Now, with the Austrian’s property empire in tatters, Galeria’s role as a “beard” for his wager on a future of endless cheap money is over. Several analysts expect the retail business to limp through the Christmas period before the lights go out some time next year.
In that event, the German taxpayer will be left out of pocket to the tune of up to €700 million. That’s the sum that Germany’s far-sighted leaders forked out from a shadow budget to bail out the company during the pandemic. Galeria hasn’t paid a cent back for over a year, and the German government is likely to have to write off the majority of its investment.
If Galeria does close for good, ninety abandoned department stores will litter German inner cities. While jewels like KaDeWe will no doubt attract a buyer, Galeria stores in less glitzy spots such as Pforzheim, Speyer or Goslar are probably less attractive to oil sheikhs.
That all leaves the future for German inner cities looking rather bleak.
Rental associations and left-wing politicians are calling for the state to jump in. Bought below the market price, the buildings could be repurposed as apartments, libraries, kindergartens or theatres, they argue.
Others seem confident that the fires scorching through the property market will allow new ideas to germinate.
Conservative newspaper the Frankfurter Allgemeine writes: “It remains to be seen how things will turn out. Residential centres, new cultural offerings and green spaces could follow. The only certainty is that when the old gives way, new will emerge. The city center is dead, long live the city center!”
But it’s hard to see where the hard cash is going to come from that will get the concrete mixers churning again.
That’s because it is not just the private sector that is out of pocket.
Germany’s federal government is in the middle of the worst budgetary crisis in decades - and the states have just as much to worry about. Just like the federal government, they have been caught using financial tricks to hide their true multi-billion euro deficits and are now panicking about where they can cut spending.
In the case of the Elbtower, the city of Hamburg has assured people that it inserted a buyback clause into the sale to Benko. But the city has made clear that it won’t use public funds to finish the build: with construction costs estimated at just short of a billion euros, it’s not hard to see why.
In Düsseldorf, where Benko was in the middle of renovating luxury shopping mall Carsch-Haus, the city mayor has admitted that “we can’t fill those types of holes ourselves.” And in debt-riddled Berlin, the city hall has stepped away from tentative plans to buy one of the Adler Group’s prized inner-city plots.
The outlook in cities such as Frankfurt and Nuremberg isn’t much better. They face similar problems after another real estate goliath, Gerchgroup, filed for bankruptcy in September.
Which is all another way of saying - the Steglitzer Kreisel may soon face stiff competition for the prize of being Germany’s ugliest Bauruine. And I won’t be alone in having the view out my front window disturbed. Hmm, I think there’s a German word that sums up that feeling…
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