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How Will Signa’s Insolvency Affect Germany?

The insolvency proceedings of Austria’s Signa Holding could negatively impact German banks and markets. The Galeria department store chain is the focus of most concern, but the real estate sector may also be in trouble.

Employees at Germany’s Galeria Karstadt Kaufhof department stores, which adorn many of the country’s city centers, have long been fearful for their jobs. Corinna Gross, head of the national retail group at Germany’s major trade union Verdi, told DW that some felt “absolute insecurity.”

Over the years, employees have already weathered two insolvencies. Of the 170 branches owned by the company in 2020, only 91 remain. Just this spring, Galeria presented an insolvency plan to shore up its remaining subsidiaries.

Now that Signa Holding GmbH, owned by Austrian real estate mogul and retail entrepreneur Rene Benko, has declared insolvency, the plan could be at risk as any remaining financing evaporates. The insolvency plan obliged parent company Signa to contribute €200 million ($218 million) to Galeria’s rehabilitation, but a large portion of that money has yet to change hands.

Germany’s last major department store group is one of 1,000 firms in the Signa network. Swiss Signa Retail Selection AG has now also filed for protection against creditors.

Is Signa’s failure a new opportunity for Galeria?

“If the investments to modernize these department stores don’t arrive, we’ve got a big problem,” Hendrik Schröder, professor in marketing and trade at the University of Duisburg-Essen, told DW. “And that problem will pass on to whoever might be interested in taking over the stores.”

Meanwhile, Verdi unionists hope this will provide an opportunity for Galeria — formally on the market since Wednesday, when Signal Retail Selection AG took the necessary steps to allow parts of the business to be sold — to find a new owner.

Union representatives hope a retailer interested in buying up the department stores will emerge. They consider a retailer far preferable to Signa, a property investor.

“Rental costs extract profits from a business,” Gross explained. “So if the owner is a property investor, in my opinion, that is the worst possible basis for a retail business.”

Both Galeria and Verdi expect business to carry on a usual in the immediate future, especially when looking ahead to the busy Christmas season.

The Galeria corporation has stated that so far the situation has not had any immediate negative consequences. The group said it plans to “calmly await” the outcome of Signa’s insolvency proceedings.

How much money have German banks staked on Signa?

Several banks might not have that same luxury. Signa primarily grew by incurring debt in the form of bank loans. The Swiss private bank Julius Baer, for example, wrote off 70 million Swiss francs (€73 million, $80 million) in November. Total nominal exposure to the group tops 600 million Swiss francs.

Several state-backed German regional banks might also be in a vulnerable position. In financial circles, the Hessian bank Helaba is said to have lent the group several hundreds of millions of euros. While Helaba has not refuted these claims outright, it has stated that it will not comment on individual customer relations.

Observers have said banks BayernLB and NordLB have lent similar amounts. There’s even talk of Baden-Württemberg’s LBBW being involved. But these claims have yet to be confirmed.

Property market under pressure

“Any other bank that has lent the Benko group money would do well to set aside capital as a precaution,” Dieter Hein, a bank analyst at the independent research firm fairesearch, told DW. “It was to be expected that real estate groups would find themselves in a bind. Signa isn’t the only group that’s in trouble, or will soon be in trouble.”

It’s possible  the market for commercial properties will soon face more upheaval. The real estate sector has come under pressure generally of late as interest rates continue to rise, subsequently pushing up financing costs.

This is ultimately what brought Signa Holding to its knees. Its business model was based on the near-zero interest rates of past years and the real estate boom this triggered.

“Signa’s bust is just the tip of the iceberg,” said Sven Carstensen, head of bulwiengesa, a consulting and analysis firm for the real estate industry in Germany.

“Of course it will affect the trade market. Everyone will become more cautious when it comes to financing. And I think it will also leave some scars in our city centers,” he added.

All Carstensen could hope for was that solutions could be found to swiftly bring individual projects to conclusion, such as the Elbtower in Hamburg. He agreed that other businesses or undertakings in the property market could be facing further trouble.

The German Retail Association, on the other hand, is optimistic. While it has admitted to being concerned about recent developments regarding Signa’s insolvency proceeding and its potential impact on Galeria, it also believes department stores are still key focal points in city centers. This also benefits neighboring stores, as well as business from other sectors, the group said, adding that it believes department stores will continue to hold a valuable place in the retail landscape.

Source : DW