# Analysis-Crisis radar falls on fault lines in Europe’s commercial property Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-04-20 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Europe's Commercial Property Faces Analysis-Crisis Meta Description: Get insights into potential fault lines in European commercial property market as interest rates surge and pandemic impacts linger. Are banks prepared? URL: https://financedigest.com/analysis-crisis-radar-falls-on-fault-lines-in-europes-commercial-propertyhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-04-20t052356z2lynxmpej3j05artroptp4europe-real-estate-stress-1736814119119-compressed.jpg) # Analysis-Crisis radar falls on fault lines in Europe’s commercial property By Chiara Elisei and Dhara Ranasinghe LONDON (Reuters) – European banks appear better positioned than U.S. peers to weather any stress from commercial property after an [interest rate](https://www.financedigest.com/czech-interest-rates-already-at-high-level-central-bank-governor-says.html "Czech interest rates already at high level, central bank governor says") surge, but that does not mean Europe is out of the danger zone. Aggressive [rate hikes](https://www.financedigest.com/oil-dips-as-potential-fed-rate-hike-overshadows-falling-stocks.html "Oil dips as potential Fed rate hike overshadows falling stocks"), still working their way through the system, follows a pandemic that hurt foot traffic to bricks-and-mortar retail locations and structurally changed work habits, with office occupancy rates still below pre-COVID levels. International Monetary Fund estimates suggest banks’ direct exposure to commercial real estate (CRE) was around 6% of bank loans on average in Europe, versus about 18% in the United States last year, meaning [Europe appears less vulnerable to risks](https://www.financedigest.com/heineken-sees-europe-resilience-offseting-asia-slowdown-risk.html "Heineken sees Europe resilience offseting Asia slowdown risk"), analysts say. ![](https://www.globalbankingandfinance.com/wp-content/uploads/2023/04/chart-4.jpg) Yet, with policymakers alert for what buckles under much [higher borrowing costs](https://www.financedigest.com/ds-smith-says-cardboard-box-volumes-strong-flags-higher-costs.html "DS Smith says cardboard box volumes strong; flags higher costs"), potential fault lines are being scrutinised. Nordic banks and CRE-specialist German banks could be pockets of weakness, especially if [systemic risks](https://www.financedigest.com/demystifying-us-feds-approach-on-systemic-climate-risk-stress-testing.html "Demystifying US Fed’s approach on Systemic Climate Risk Stress Testing") emerge, Barclays said on Wednesday. And although CRE risk was not front and centre of last week’s IMF meetings in Washington, concern was visible. IMF Managing Director Kristalina Georgieva stressed the need “to monitor risks that may be hiding in the shadows, in banks and non-bank financial institutions or in [sectors](https://www.financedigest.com/time-to-act-as-cybercriminals-hot-on-the-heels-of-finance-sector.html "Time to act as cybercriminals hot on the heels of finance sector") such as CRE.” In its financial stability report, the IMF noted growing concerns about CRE given a heavy dependence on smaller banks. “Even in Europe then, there may be patches of property- related vulnerability in the financial system, though none has yet emerged as a major threat to the banks,” said Capital Economics chief property economist Andrew Burrell, noting [euro zone](https://www.financedigest.com/croatia-heading-to-enter-euro-zone-adopts-first-budget-in-euros.html "Croatia, heading to enter euro zone, adopts first budget in euros") commercial property values were expected to fall about 20% before they bottom out. The European [Central Bank’s key rate](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") has jumped to 3% from -0.5% a year ago, and is headed higher. A recent JP Morgan [global investor survey cited CRE as the most likely cause of the next crisis](https://www.financedigest.com/global-economic-crisis-strangling-progress-for-poor-warns-u-n-development-chief.html "Global economic crisis strangling progress for poor, warns U.N. development chief"). ![](https://www.globalbankingandfinance.com/wp-content/uploads/2023/04/chart-3.jpg) “If you were to rank what are the biggest risks to your outlook, for us that (CRE exposure) would be among the top three,” said Robeco portfolio manager Daniel Ender. FAULT LINES In Europe, where offices account for the bulk of the real estate market, German and Nordic banks most exposed to construction and real estate activities were seen as ones to watch. ![](https://www.globalbankingandfinance.com/wp-content/uploads/2023/04/chart-2.jpg) Barclays said that if CRE became a larger systemic risk, Swedish [banks could be more at risk](https://www.financedigest.com/bank-of-england-says-it-will-unwind-bond-market-intervention-once-risks-have-subsided.html "Bank of England says it will unwind bond market intervention once risks have subsided"). Borrowing by Swedish property companies has jumped to 2,300 billion Swedish crowns ($223 billion) in 2021 from 1,300 billion crowns in 2012. German specialised property lenders such as [Aareal Bank, Deutsche Pfandbriefbank and Berlin Hyp, have a bigger concentration of real estate](https://www.financedigest.com/from-static-office-to-dynamic-brand-hq-five-steps-to-reviewing-your-real-estate.html "From static office to dynamic brand HQ: Five steps to reviewing your real estate") exposure, analysts added. Aareal Bank declined to comment. Deutsche Pfandbriefbank and Berlin Hyp did not return a request for comment. Robeco’s Ender said although big [European banks](https://www.financedigest.com/european-banks-cash-in-on-rising-rates-as-clouds-gather.html "European banks cash in on rising rates as clouds gather") did not have a “massive amount” of CRE exposure, equity market valuations signalled significant pain for real estate companies, with German names especially trading at substantial discounts to their assets as valued by third-party appraisals. Tighter [bank financing conditions reinforce the effects of higher interest rates](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies"), making refinancing tougher over the coming years, analysts said. The ECB’s banking supervisor [last year](https://www.financedigest.com/uk-new-car-sales-rise-in-january-full-year-sales-to-top-last-year-smmt.html "UK new car sales rise in January, full-year sales to top last year – SMMT") found “deficiencies” at most banks in how they assess prospective borrowers’ ability to repay. CRE accounts for as much as 30% of non-performing loans across [European banks](https://www.financedigest.com/more-banks-join-european-instant-payments-pilot-from-end-2023.html "More banks join European instant payments pilot from end 2023"), it said. Possible redemptions from real estate investment funds, making up 40% of the [euro zone](https://www.financedigest.com/euro-zone-business-activity-contracted-again-in-aug-outlook-bleak-2.html "Euro zone business activity contracted again in Aug, outlook bleak") CRE market in 2022, having doubled over a decade, according to the ECB, was another worry. It has [warned that “forced liquidation of real estate assets to meet investor redemptions might lead to downward pressure on CRE prices.”](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain") Blackstone recently blocked withdrawals from its $70 billion [real estate income](https://www.financedigest.com/how-to-buy-income-producing-real-estate-without-your-own-money-or-credit.html "How to Buy Income-Producing Real Estate Without Your Own Money or Credit") trust after facing a flurry of redemption requests. Open-ended [real estate funds](https://www.financedigest.com/the-professionals-at-real-estate-funding-solutions-helping-you-find-success-with-commercial-real-estate-loans.html "The Professionals At Real Estate Funding Solutions Helping You Find Success With Commercial Real Estate Loans") in Britain have also battled to meet strong demand for redemptions. It’s a little bit circular: if banks are finding stresses in other parts of their [balance sheets](https://www.financedigest.com/ecb-policymakers-back-jumbo-rate-hike-differ-on-balance-sheet-cut.html "ECB policymakers back jumbo rate hike, differ on balance sheet cut") and need to focus on preserving capital to reserve against those losses, this might impact their ability to refinance existing CRE loans, triggering a self-fulfilling prophecy,” said Hans Vrensen, head of research and strategy at real estate investment firm AEW. In Europe, CRE exposure for smaller banks, more at risk of [deposit flight](https://www.financedigest.com/apollo-assures-investors-deposit-flight-wont-spill-over-to-athene.html "Apollo assures investors deposit flight won’t spill over to Athene"), is estimated at under 30% of all loans, Capital Economics said. Tighter bank [regulation](https://www.financedigest.com/exclusive-china-regulator-launches-new-probe-into-banks-property-loan-exposure-sources.html "Exclusive-China regulator launches new probe into banks’ property loan exposure – sources") also suggests European banks have less to fear. “\[European\] banks are in a much better [position this time round with larger reserves against potential](https://www.financedigest.com/grab-and-go-containers-market-anticipated-to-have-positive-potential-during-the-forecast-period-fmi.html "Grab and Go Containers Market anticipated to have positive potential during the forecast period.: FMI") losses; if you look at the tier one capital ratios, especially in countries like Italy and Spain, it has stepped up tremendously,” said Massimo Bianchi, head of special situations real estate at illimity Bank. Unlisted global property funds meanwhile have as much as $811 billion in dry powder to support CRE investment when [markets recover](https://www.financedigest.com/the-five-steps-to-help-the-luxury-market-recover-from-covid-19.html "The five steps to help the luxury market recover from Covid-19"), Savills estimates. Around $500 [billion of this war chest is focused on European assets](https://www.financedigest.com/british-pensions-step-up-multi-billion-pound-asset-fire-sale-as-need-for-cash-soars.html "British pensions step up multi-billion-pound asset fire sale as need for cash soars"). Even if the sector can weather the pain of higher rates, climate risks pose longer-term challenges. On one side, there is pressure on lenders to lend more to green projects,” said Jackie Bowie, [managing partner](https://www.financedigest.com/reckon-software-goes-from-strength-to-strength-with-appointment-of-new-partner-development-manager.html "Reckon Software goes from strength to strength with appointment of new Partner Development Manager") at Chatham Financial. “On the other, real estate owners themselves are going to face quite material increase in costs.” ($1 = 10.3323 [Swedish crowns)](https://www.financedigest.com/u-s-dollar-gains-ahead-of-fed-swedish-crown-falls-after-hike.html "U.S. dollar gains ahead of Fed; Swedish crown falls after hike") ($1 = 0.9147 euros) (Reporting by Chiara Elisei and Dhara Ranasinghe; Additional reporting by Yoruk Bahceli in Amsterdam, Sinead Cruise in London and Francesco Canepa in Frankfurt; Editing by Sharon Singleton) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---