The commercial real estate sector (CRE) has been hit by multiple factors in the preceding years. The complete shutdown of commercial properties during the pandemic and the new operation models adopted by companies post-pandemic both hurt the demand in the CRE sector. The sector was then hit by higher lending rates from banks, making re-financing of properties almost impossible.
The European Central Bank (ECB)’s key rate has increased from 0.5% to 3% over the course of last year. While assessing the fallout of this rate hike, all key financial institutions in Europe expressed concerns about the CRE sector.
The IMF reported that the banks’ direct exposure to CRE loans was 6% in Europe as opposed to 18% in the USA. This makes the banking sector as a whole stronger in Europe. However, certain banks were considered to be at special risk due to their higher-than-average direct exposure to CRE loans.
The list included Nordic banks and a few German banks dedicated to real estate investments. Barclays said on Wednesday that the banks mentioned above could be pockets of weakness if a systemic risk was to emerge.
IMF Managing Director Kristalina Georgieva said that there was a need to ‘monitor risks hiding in the shadows.’ Her comments were directed at banks and non-banking financial companies (NBFCs) alike. The IMF report expressed concerns about smaller banks and their exposure to sectors like CRE.
Capital Economics chief property economist Andrew Burrell speculated that the CRE market in the Eurozone will bottom out after falling about 20 percent more. He also added that so far at least these drops in asset value have not emerged as a threat to the banking system.
Experts warned that the prices could drop further if banks try to collect debts by foreclosing properties.
CRE accounts for over 30% of non-performing loans in European banks, according to ECB. Therefore, experts will continue to observe the sector with concern.
The Nordic banks and the German Aareal Bank, Deutsche Pfandbriefbank, and Berlin Hyp did not comment on the concerns voiced by experts.
The total CRE debt of Nordic Banks has gone up to 2,300 billion Swedish crowns ($223 billion) in 2021 from 1,300 billion crowns in 2012.
