Aareal reports profit increase despite loss in Russia

The German lender reported a 54% profit increase despite being forced to take a write-down due to Russian counter sanctions.

The chief financial officer of Aareal Bank has said the German lender will aim to grow its real estate loan book by up to €2 billion this year following a “strong set of financial results” for 2022, in which profits exceeded targets despite a multi-million euro loss on a Russian loan.

Marc Hess, chief financial officer, and member of Aareal’s management board, told Real Estate Capital Europe: “We are pleased [with] having hit our targets despite an extraordinary write-down in relation to our last remaining loan in Russia. This shows that our strategy is paying off and our earnings momentum was strong enough to digest an unexpected loss.”

Aareal reported an operating profit of €239 million in its preliminary results for 2022, up 54 percent from the €155 million it reported in the previous year. This was despite registering a €134 million loss relating to a loan secured against an office complex in Moscow – the repayments of which have been intercepted by the Russian government.

Aareal opened a representative office in Moscow in 2008, as part of a wider push into central and eastern Europe but began winding down its Russian real estate loan portfolio only four years later, after building a €1 billion book.

During the first quarter of 2022, Aareal reported its exposure to Russia totalled €200 million, accounted for by one loan, secured against two modern office buildings in the centre of Moscow.

Hess explained: “The borrower is willing to pay. But the money is trapped due to Russian counter sanctions against what it calls ‘unfriendly Western countries’, and therefore the Russian government has prevented those repayments from leaving the country.”

Elsewhere, however, the lender is in growth mode, said Hess. Aareal’s global real estate loan book grew from €30 billion to €30.9 billion over 2022 – the net effect of new loans, renewals and loan expiries. In 2023, it is seeking to increase this to as much as €33 billion.

Hess said: “When it starts raining, we don’t move the umbrella. We have a reputation for being a reliable partner and that is paying off. We carried on lending during the GFC and we did the same during covid.”

Referring to the bank’s plans beyond 2023, Hess added: “This is a pace of growth we want to maintain.”

In February 2022, Aareal announced its target for 2024 was a consolidated operating profit of up to €350 million. But Hess said that given its strong 2022 operating performance, the lender is confident that it will be able to achieve these results at an operational level as early as this year.

Lending focus

Aareal, which committed most of its new lending to the hotel sector in 2022, is likely to focus its lending efforts on hotels, retail and logistics, rather than offices.

Offices accounted for 27 percent of the lender’s loan book by the end of 2022, a decrease from the previous year, when it accounted for 30 percent.

The yield-on-debt from its office loans also decreased, while increasing across all other of the asset classes in its portfolio. YOD increased from 5 percent to 9 percent over the period on its hotel portfolio, but it decreased for offices – from 7.6 percent to 6.9 percent.

Hess said that while there was “value to be found in offices, it was important to be selective” when lending to this sector: “In terms of cashflow, offices is the only sector where we had a reduction last year, all other sectors improved – especially hotels, which has recovered very well from covid-19.”

Explaining the decrease in cashflow, he said: “Office owners are undergoing work to upgrade assets in line with environmental regulation, leading to vacancy, while tenants were also demanding concessions on rents.”

“This makes us more cautious on the sector,” said Hess, who added that typically the sector had accounted for around 35 percent of annual new business but that it had decreased to 20 percent in 2022.

The results for 2022 also reflected a decrease in the average loan-to-value across all sectors, with hotel LTVs now averaging 56 percent, from 60 percent in 2021); logistics at 52 percent, from 55 percent in 2021); offices at 57 percent, from 58 percent in 2021; and retail at 56 percent, down from 59 percent.