Is this the beginning of a correction or even a crash on the overheated German real estate market? In any case, the Adler case sheds light on the excesses of recent years. Although the scandal is homemade, there could be other similar cases.
Sunrise in Berlin: The real estate market in the capital has been booming for years. There, too, Adler’s projects have been talked about.
The real estate market in Germany has been asleep for a long time. After a brief boom following reunification, house prices have remained very stable for a long time since the mid-1990s. That only changed from 2011. Driven primarily by the very low interest rates, especially for Germany, the house price index has doubled since then. Despite the pandemic, prices have continued to climb steeply and the rally has so far remained unchanged – nevertheless, the end of the bonanza could be very close, not least because of the interest rate turnaround that is now imminent.
Carelessness in the real estate market
Whether and when a boom has led to a bubble in a market is often only known afterwards. However, excessive developments on the German real estate market – for example financing offers for buyers without equity and very high purchase prices for real estate even in unattractive cities and locations – have long indicated that the danger of a significant correction is real. The Bundesbank and the financial supervisory authority have rightly been warning for some time that banks and real estate companies should be too careless.
Apparently, the supervisory authorities have little in view of the processes and mechanics in the market for real estate developers. The companies in question have posted immense balance sheet revaluation gains with their portfolios in recent years. They then often used this to raise outside capital. This, in turn, helped fund new projects, buy back shares, or pay out dividends — and it’s a tricky cycle.
Revaluation gains from IFRS
The practice, reminiscent of a pyramid scheme, is completely legal. Companies are even forced by the European accounting standards IFRS to make revaluation gains every year in a rising market. However, no one forces the developers to use these profits again immediately. But business acumen sometimes bordering on greed leads managers to risky behavior. With the American accounting standard US-GAAP, on the other hand, no revaluation gains are permitted.
At the real estate group Adler Group, which has finally been in the public eye since Friday and for which the auditors from KPMG have refused the attestation for the annual and individual financial statements for 2021, several delicate processes are coming together. The company has reported high cumulative revaluation gains and a critically high financial ratio (loan-to-value) in recent years, indicating an aggressive valuation.
Collapsing Adler stocks
In addition, the group is accused of having sold real estate projects within Family & Friends structures at inflated prices in order to artificially drive up the prices of the projects. KPMG’s refusal to attest suggests that the allegations may be valid and reflects very poorly on Adler Group. The future will show to what extent the processes are also justiciable. However, shareholder protectors are already alarmed and active in the face of a price slump of over 70 percent.
In addition, the auditors are once again not in a good light. Although KPMG has now refused the attestation after a special audit, the initiative did not come from the auditors themselves British short seller Fraser Perring, who had also successfully pointed out the events at Wirecard. This raises the question once again of what financial statements certified by auditors are worth.
Ultimately, an overheated market almost inevitably leads to excess. This has often been observed in the past. So far, the Adler Group case only shows some of the problems that have arisen. More will come to light in the coming months and years.
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