This is how Germany’s property boom ended

Tom Sims and John O’Donnell, Reuters

It has been a tumultuous year for one prominent German property developer: his efforts to sell his penthouse atop a Nazi-era air raid shelter have stalled, and just weeks ago his firm filed for insolvency. The one-two punch for the developer, Stefan Hoeglmaier, and his company, Euroboden, mirror the travails of the broader property sector across Europe’s largest economy as it suffers its worst slump in decades. For years, low interest rates fuelled a global boom, igniting interest in German property, seen as safe and stable as the country.

A sharp rise in rates, and soaring energy and building costs, put an end to the run. That has tipped a string of developers into insolvency, frozen deals and pushed prices down, prompting the industry to appeal to Chancellor Olaf Scholz for help. “We’re heading for the wall at breakneck speed. The first developers have fallen and more will follow,” said Tillmann Peeters, an insolvency lawyer with FalkenSteg. Developers’ fortunes, including Euroboden, changed in 2022 when the European Central Bank began to increase rates, making it harder for to borrow and to find buyers for projects. A statement from Euroboden management said the market environment for the company had “deteriorated quite considerably”.

The health of Germany’s property sector — Europe’s biggest property investment market outside of Britain — is critical, making up roughly a fifth of output and providing one in 10 jobs. New building during the first half of the year nearly halved from the past two years. In 2010, in the early days of a years-long boom, Hoeglmaier bought a dilapidated aboveground bunker in a posh Munich neighbourhood from the government to convert it into luxury apartments. He and his partner Oscar Loya — a Eurovision Song Contest star — took for themselves the three-floor penthouse, complete with music room and gold-leaf walls in the toilet. During the decade that followed, Euroboden completed projects with renowned architects, generated tens of millions of euros in profit, raised millions from investors, and expanded to Berlin and beyond.

The penthouse made the cover of Germany’s Architectural Digest, and the couple hosted “bunker acoustic sessions”, with video clips posted to Loya’s Facebook page. Loya, who owns stakes in two Euroboden subsidiaries, also serenaded staff at the company’s 20-year anniversary party in 2019. The property boom came to an abrupt end last year when the speed of interest rate increases caught many in the sector off guard. Euroboden issued a profit warning in October. Late last year, Hoeglmaier put his penthouse on the market, and Euroboden closed its Frankfurt office. In late July, Euroboden called a meeting to ask investors to restructure 92 million euros ($100 million) in outstanding bonds, but after they balked at the new conditions, the company cancelled the meeting days later and filed for insolvency.

“It was relatively clear that bondholders would not accept the proposal,” said Daniel Bauer, chief of the SdK association of capital investors that is representing nearly 800 Euroboden investors with 11 million euros in bonds. The person overseeing the insolvency, Oliver Schartl, said that the case was relatively complex and in an early phase. Throughout, Euroboden has blamed the pandemic, the war in Ukraine, inflation and interest rates — the same toxic mix that has inflicted pain on the entire industry. Hoeglmaier declined to be interviewed for this story saying he needed privacy to focus on business, while Loya did not respond to requests for comment. Euroboden is not an isolated case. Several other German property developers filed for insolvency in recent months. Duesseldorf-based Gerch, with 4 billion euros of projects, is Germany’s biggest casualty so far. Property professionals fear the downturn in Germany could prove deeper than the 1990s crash following the dash for property in eastern Germany after the fall of the Berlin wall.

“The rise in building costs, shift away from office working and rising interest rates mean we’ll see many more developers run out of steam,” said Christoph Niering, who chairs the umbrella body for insolvency administrators, VID.

“Most people did not see this crisis coming. It is now surprising how quickly it is unfolding.” Lenders too were slow to respond. In 2020, as the property market heated up, the Bundesbank warned the country’s banks, for whom property accounted for about 70% of all domestic loans, of the risks. In August, it warned again that property remained overvalued, despite recent falls, expressing hope, however, that low unemployment meant most borrowers could keep up loan repayments. Germany and Sweden are the hardest hit on continental Europe by a global property rout that has sucked in homebuilders in China, from Evergrande to Country Garden. Hoeglmaier’s bunker was originally erected in the early 1940s to shield residents from allied bombs. After the war, nearby grounds served as camps for imprisoned Nazis and then refugees, and local hairdressers and hotels sought permission to post their ads on its bullet-pocked facade.

Since 2005, Germany has sold some 320 bunkers. The 380-square meter (4,090 square foot) penthouse, which occupies the fifth through seventh floors and includes a rooftop terrace, originally listed for just under 13 million euros. The price dropped to 11 million earlier this year, but it is still one of the most expensive apartments in Germany. “If interested,” the listing reads “some of the furniture and lamps can be purchased.”