The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the B- issuer rating of DEMIRE Deutsche Mittelstand Real Estate AG (DEMIRE) and revised the Outlook to Negative from Positive. Concurrently, Scope has affirmed the B rating of DEMIRE’s senior secured bond (ISIN DE000A2YPAK1).

The Outlook revision to Negative reflects the issuer's fragile capital structure with rising leverage and weakening interest coverage. Payment-in-kind (PIK) accruals and limited deleveraging have increased refinancing risk, leaving little room for error ahead of the 2027 bond maturity and making further restructuring highly likely.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: B+ (revised from BB-). DEMIRE's business risk profile has been revised down due to its weakening profitability, caused by cost rigidity linked to poor asset quality and ongoing restructuring efforts.

DEMIRE is a German commercial real estate company of limited size with a portfolio of 46 properties representing 573,000 sqm of gross lettable area as of September 2025. Scope-adjusted total assets* stood at EUR 0.8bn, representing an 8% YTD decline due to EUR 15m in disposals and a 4% decrease in fair value. DEMIRE’s focus on B and C cities and its lack of ESG certifications (ESG factor: credit-negative) weaken its competitive position and limit its access to debt and equity markets. Further disposals are planned to reduce leverage amid the ongoing negative impact of higher interest rates and subdued investor demand.

Although the company is geographically diversified, its concentration risk is high: the top 10 assets account for around 50% of rents, and the top 10 tenants account for 44.9% of total rents (top three: 24.5%), all as of September 2025. The exposure to offices (64%) and retail (30%) adds structural demand risk, with office vacancies increasing by 4pp since the end of 2024. Asset quality remains weak. Portfolio occupancy has fallen to 83% (down 2pp YTD), the weighted average unexpired lease term has stabilised at 4.7 years, and rental growth remains negative at -3.2% in 2024 and -3.0% YTD. This limits cash flow visibility despite most leases being index-linked. Scope anticipates that the tenant mix will shift further towards small and medium-sized enterprises. While this will reduce counterparty credit quality, diversification will improve.

The EBITDA margin fell to 52% in 2024 (down 10pp YoY) and is forecast to stabilise in the range of 45%–50% (last 12 months to September 2025: 54%). The sharp decline and limited anticipated recovery are linked to non-recoverable property expenses, rising vacancies, and elevated selling, general and administrative costs relating to structural overheads and additional restructuring-related charges. This illustrates the issuer’s limited operating leverage and cost flexibility, which heightens its sensitivity to revenue erosion. Scope also does not expect the level of profitability to improve significantly in the long term. This is because the portfolio, being generally of a more secondary nature, does not support premium rents but requires more management attention – reflected in the relatively high EPRA cost ratios (Q2 2025: 46.6% including vacancies and 40.4% excluding vacancies), also compared to peers.

Financial risk profile: CCC (revised from B-). The revision of the financial risk profile reflects: i) accelerating leverage, due to PIK components embedded in main debt facilities that are not offset by property disposals and related debt repayments; and ii) deteriorating interest cover reflecting structural cost rigidity and lower-than-expected cash interest income. Consequently, Scope sees the capital structure as unsustainable and likely to require debt restructuring to preserve the going concern status.

Although the 2024 bond restructuring provided temporary relief, DEMIRE’s capital structure has become increasingly fragile. The PIK features on the bond and shareholder loan are accelerating leverage growth, with the loan/value ratio rising above 60% by September 2025 (from 57% in 2024) and expected to exceed 70% by 2027. Scope expects that debt will exceed EUR 600m by 2027 (up from around EUR 500m at the end of September 2025). This is due to compounding interest as well as an underperforming disposal strategy. Asset disposals of only EUR 46m have been realised in 2025 YTD as market appetite for secondary assets remains low and execution risk is high. Further disposals are planned, but the pricing pressure persists. This leaves the capital structure unsustainable amid declining profitability and fair value write-downs.

EBITDA interest coverage has deteriorated sharply, falling to 2.4x in 2024 and to 1.5x for the last 12 months to September 2025. This reflects higher debt costs (weighted average of over 4%, excluding PIK components, compared to 1.9% in the previous year), pressure on profitability due to non-recoverable costs and increased selling, general and administrative costs, and lower-than-expected cash interest income. Scope expects interest coverage to remain weak at 1.3x–1.5x, and below 1x when including PIK accruals. These underscore the refinancing risk and the structural unsustainability of the capital structure.

Capex, which was historically funded by internal cash flow, has been cut since 2022 to preserve liquidity and support debt servicing. However, Scope sees this as underinvestment in the portfolio and therefore unsustainable. Future capex needs of around EUR 20m annually will likely require external funding, as proceeds from asset disposals are earmarked for deleveraging rather than reinvestment.

Liquidity: inadequate; -3 notches (unchanged). Liquidity is deemed inadequate. Cash sources (around EUR 49m at the end of September 2025) are insufficient to cover cash requirements (expected free operating cash flow of negative EUR 30m until the end of 2027, EUR 99m of maturing bank debt due between end-September 2025 and 2027¹, and the EUR 247m bond due in December 2027). However, Scope believes that most of the maturing bank loans will be rolled over or refinanced with other banks, as evidenced by the issuer’s recent track record.

Refinancing the EUR 247m bond poses a far greater challenge than refinancing mortgage debt as this would require either asset disposals or additional secured financing that makes use of EUR 347m of unencumbered assets (as of end-September 2025). However, both options are unlikely given the weak investor appetite and execution risk. While management is exploring all possibilities for refinancing the bond before its maturity in 2027, any potential solution will likely require an extension or restructuring of the shareholder loan, which is expected to exceed EUR 200m by its maturity in 2028. With the EBITDA interest coverage (including PIK components) at below 1x and little headroom on the balance sheet, further debt restructuring is highly likely within the next 12–18 months to preserve the going concern status.

Supplementary rating drivers: credit-neutral (unchanged). Supplementary rating drivers have no impact on the issuer rating.

One or more key drivers of the credit rating action are considered an ESG factor.

 Outlook and rating sensitivities

The Negative Outlook reflects the issuer's increasingly fragile capital structure, characterised by rising leverage amid weak asset sales, which drives refinancing risk and increases the likelihood of another debt restructuring. The Outlook takes into account the continued refinancing of secured bank loans, albeit at a higher all-in cost.

The upside scenario for the ratings and Outlook is:

• Easing concerns about the liquidity profile, supported by a further substantial reduction in senior secured bonds through further asset sales.

The downside scenarios for the ratings and Outlook are (individually):

• Growing concerns about liquidity and/or refinancing.
   
• Any debt restructuring which could be considered as a distressed exchange.

Debt rating

Scope has affirmed the B rating of the senior secured bond, one notch above the issuer rating. DEMIRE has EUR 247m in senior secured capital market debt outstanding as at end-October 2025.

Scope has derived an excellent recovery for senior secured debt, which theoretically allows for a three-notch uplift above the issuer rating. However, the agency has restricted the uplift to one notch based on two factors that could reduce recovery expectations. Firstly, a large portion of secured bank debt ranks higher than the senior secured bond and has better collateral (real estate as opposed to the bond’s share and account pledges). Secondly, Scope sees the potential for the addition of even more secured bank debt on a path to default.

The recovery expectation is based on a hypothetical default scenario in FY 2027 with a distressed enterprise value of around EUR 530m. This value is based on the company’s liquidation value and includes a discount of around 26% for investment properties, consistent with a B category stress, and reflecting the portfolio’s secondary nature and 10% for insolvency costs. This compares to the forecasted secured bank debt of EUR 182m, the secured bond of EUR 247m and EUR 183m in unsecured subordinated debt at the time of a potential default.

Environmental, social and governance (ESG) factors

Scope has made no adjustment for governance under supplementary rating drivers but highlights potential issues related to the rated entity's complex group structure. While the multi-layered structure protects liquidity in times of disruption within the property/sub-holding special purpose vehicles, it creates some operational risk. However, the double LuxCo structure gives bondholders direct access to the shares of the companies (including DEMIRE and Fair Value REIT-AG) in the event of default. Scope sees this as an advantage over the previous structure.

DEMIRE's portfolio of non-ESG-certified properties is a competitive disadvantage which, combined with the more secondary locations in which the issuer operates, limits achievable rents and requires relatively high capital expenditure to remain attractive to tenants and avoid the risk of stranded assets.

All rating actions and rated entities

DEMIRE Deutsche Mittelstand Real Estate AG

Issuer rating: B-/Negative, Outlook change

Senior secured debt instrument (ISIN DE000A2YPAK1) rating: B, affirmation

1. Of this, EUR 24m has been repaid and EUR 29m refinanced between the end of September 2025 and the publication of this rating action.

*All credit metrics refer to Scope-adjusted figures.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 14 February 2025; European Real Estate Rating Methodology, 2 June 2025), are available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Philipp Wass, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 December 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2025 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.