The Degag real estate group has raised approximately €275 million from investors through profit participation rights. Now, the roughly 4,700 investors fear for their invested funds. As announced by Deutsche Grundbesitz Holding AG (Degag) in mid-December, the company has suspended interest and repayment obligations to investors.
Degag justifies the suspension of payments with the contractually agreed subordination of investors’ claims. This now reveals to investors that they have invested in a highly risky financial product. Due to the subordination clause, they cannot enforce their claims if doing so would lead the company into insolvency. If insolvency does occur, investors risk losing their investments, as their claims are subordinate to those of all other creditors. However, such subordination clauses are not always legally binding. This must be verified, according to the law firm MTR Legal Rechtsanwälte, which has extensive experience in capital market law and in enforcing investor claims.
Investors Participate Through Profit Participation Rights
The Degag Group’s business model involved acquiring aging properties, renovating them, and subsequently renting or selling them. Investors could participate through profit participation rights issued by Degag Kapital GmbH, Degag Wi8 GmbH, and Degag Bestand und Neubau 1 GmbH. In return, investors were promised annual interest payments. Although the concept initially seemed successful, problems have recently emerged.
In late 2023, a financial institution withdrew from refinancing Degag’s housing portfolio. Efforts to secure bridge financing have failed, ultimately necessitating the suspension of interest and repayment obligations to investors, according to a Degag board member in a statement to Handelsblatt.
BaFin: Imminent Payment Defaults
These developments jeopardize investor funds. On December 20, 2024, the financial regulator BaFin published statements from the issuers Degag Kapital GmbH, Degag Wi8 GmbH, and Degag Bestand und Neubau 1 GmbH, highlighting imminent payment defaults. These statements indicated that investor funds were invested in affiliated real estate companies. At present, there are outstanding claims by the issuers against these companies, and defaults on these claims cannot be ruled out. This could adversely affect payouts to investors. Payments are not guaranteed. Consequently, payments due on December 16, 2024, could not be made on time.
Various Profit Participation Rights Affected
For Degag Kapital GmbH, the affected profit participation rights include Series L investments with minimum terms of 5 or 10 years and the DEGAG WohnInvest 7 profit participation rights, also with terms of 5 or 10 years.
Investors in Degag Wi8 GmbH’s DEGAG WohnInvest 8 profit participation rights with 5- and 10-year terms also face potential losses. At Degag Bestand und Neubau 1 GmbH, the affected investments include the DEGAG Wohnkonzept 1 and Wohnkonzept 2 profit participation rights.
Stiftung Warentest Warns of Risks
Stiftung Warentest added Degag Group’s profit participation rights to its warning list as early as August 2024. Profit participation rights are a high-risk investment in which investors provide equity-like risk capital. This risk is compounded by subordination clauses, making it difficult for investors to enforce their claims in critical situations.
The risks are no longer theoretical. To mitigate financial losses, investors should explore their legal options. For instance, claims for damages against investment advisors or intermediaries may arise. Advisors should have fully informed investors about all factors relevant to their investment decision, including the high risks of profit participation rights and, in particular, the agreed subordination. If these risks were downplayed or concealed during investment advisory sessions, investors may have grounds for claims. Additionally, the validity of the subordination clause must be reviewed.
MTR Legal Rechtsanwälte has extensive experience in capital market law and advises affected Degag investors.
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