The department store operator Galeria Karstadt Kaufhof has been in insolvency proceedings under self-administration since this week. The owner is Signa Holding, a group of Austrian entrepreneur René Benko. She plays an unusual dual role: a division of the group runs the trading business; the other still holds part of the properties taken over with Karstadt and Kaufhof.
Ever since René Benko bought Karstadt ten years ago and then merged it with Kaufhof, critics have suspected that the entrepreneur is less concerned with the retail business than with real estate in attractive inner-city locations. For example, Signa is currently expanding the Kaufhof department store on the centrally located Alexanderplatz in Berlin with a 134-metre-high office tower – thereby multiplying the value of the property.
The Austrians, on the other hand, emphasize that they have invested a lot of money in the Galeria renovation, which has so far been moderately successful. However, they have separated the distressed commercial business from the promising real estate. Galeria pays rent to Signa’s real estate division – this is probably also possible thanks to the Corona loan from the federal government in the amount of 680 million euros.
It is undisputed that the protective shield procedure for Galeria also affects the real estate business. Because in the process, Galeria can terminate leases out of order under the direction of the insolvency administrator. At least a third of the 131 branches should close. This could also affect those department stores that Signa’s real estate division has rented.
Nevertheless, assessments by rating agencies show that the effects on the real estate business will initially be limited. Because the ongoing rental income is comparatively low anyway. But: If the problems persist, it could take longer than planned before Signa can implement value-enhancing conversions.
Signa is an important player in the real estate market in Germany – especially in Berlin, Hamburg and Munich. In the summer of 2020, Signa put the values in the real estate sector at a total of 14 billion euros in a capital market prospectus. Of this, 6.6 billion went to the subsidiary Signa Prime, which manages particularly spectacular real estate projects such as Berlin’s KaDeWe or the planned Elbtower high-rise in Hamburg. Signa also docked some Galeria properties to this subsidiary. Others are at sister company Signa Development, which implements projects in less prestigious locations.
The company structure is nested, but one thing is clear: the real estate business of Galeria mother Signa is less affected this time than in previous problems, for example during the first protective shield procedure in the Corona crisis. Because Signa now holds fewer houses: In July 2020, Signa Prime sold 21 of 33 “non-strategic” Karstadt properties, most of which were held together with the real estate developer RFR, to the financial investor Apollo.
This spring, the “Lebensmittel Zeitung” reported that Signa was already looking for a buyer for a large part of the 18 properties acquired with Kaufhof. Three other houses, in which a Commerzbank fund has a stake, were also for sale.
Nevertheless, according to a bond prospectus published in 2020, Galeria will continue to be an important tenant for Signa Prime in future planning – even if the share of rental income with new projects is expected to continue to decrease: If Galeria ceases to be a tenant, “Signa Prime would suffer a significant drop in rental income”. , it says in the prospectus about the risks of a bond.
The department stores are also important for the Signa subsidiary Signa Development, but not central: According to a report by the rating agency Fitch from June 2022, the department stores still make up 13 percent of the portfolio value of Signa Development Selection. The gross asset value (GAV) of those Kaufhof properties that Signa took over with the chain in 2019 is half a billion euros.
However, the rental income is probably not the decisive factor in the calculation: The experts from Fitch and the agency Creditreform complain that the Signa company as a whole only achieves relatively little regular rental income. The Kaufhof portfolio in particular only makes small profits after costs.
Instead, the real estate developer’s business model is essentially based on significant increases in the value of the real estate – especially through conversion and expansion. The cash flows therefore fluctuate with the completion dates of the projects. It’s about a lot of money: loans of one billion euros were secured at Signa Development with such projects.
Galeria Karstadt Kaufhof has again applied for insolvency under self-administration. “There will be massive job cuts,” says WELT reporter Daniel Koop. He spoke to employees in front of a branch in Frankfurt: “Hundreds are very worried here.” Two factors are responsible for the problems.
Source: WORLD
The experts at Fitch write that there are also opportunities for the Galeria department stores to further develop the properties – for example through conversion – and thus increase their value. Problems in the department store market and complicated lease negotiations could delay such plans, Fitch experts warn: “Some development plans depend on Galeria as a tenant, but the largest development projects are mixed-use.” Some department store properties are already earmarked for sale, confirmed Fitch.
The agency rates Signa Development’s creditworthiness as B- and individual bonds as B . So they see the papers in the speculative area.
Creditreform, on the other hand, examined Signa Prime’s creditworthiness in September 2022. This rating agency was also critical of Galeria even before the new protective shield procedure: “We continue to assume extremely restrained business development, limited financial strength and below-average creditworthiness for this major tenant in the 2021/22 financial year, which also remains to be observed,” they warn Report.
They recently added a negative outlook to their solid A rating for Signa Prime – partly because of the “operative internal financing power from the rental business, which is in need of much improvement for the rating level”, i.e. the low rental income. They also noted that Signa continues to pay high dividends to owners such as the logistics entrepreneur Klaus-Michael Kühne, even though the company has to finance itself heavily through outside capital.
However, the Creditreform experts praised the fact that the planned sale of Galeria properties would reduce the tenant risk with the high-risk Galeria business in the medium to long term and support liquidity. Overall, they saw increasing risks for Signa due to generally weakening valuations on the real estate market and rising construction costs, at least since the start of the Ukraine war.
This shows that the Galeria insolvency does not leave Signa’s core real estate business unaffected. However, a Signa spokesman did not comment on the effects of the Galeria insolvency proceedings on the real estate business.
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