Decline in value of commercial space
Banks are threatened with a “multi-year crisis” due to real estate prices
March 18, 2024, 11:45 a.m
Listen to article
This audio version was artificially generated. More info | Send feedback
The falling prices for commercial real estate are becoming an ever greater danger for banks. Germany is also recording historically strong declines. According to the EU banking supervisory authority Eba, financial institutions have to prepare for a crisis that will last several years.
Home office, construction crisis and online trading are not only causing turbulence in the commercial real estate market. The crisis is now also putting a strain on banks’ balance sheets. In an interview with the “Handelsblatt” warns the head of the EU banking supervisory authority Eba, José Manuel Campa: “The banks have to prepare for a crisis that will last several years.” Institutions that specialize in commercial real estate could “face greater challenges than other, more broadly positioned banks.” However, he sees “no systemic danger” for the banking system as a whole.
Commercial real estate is currently “among the biggest risks for the banking sector,” says Campa. The problems are currently particularly serious in the USA. This is due to the sharp rise in interest rates and the trend towards more home offices. “The impact in Europe probably won’t be as severe as in the US, but the underlying trend is similar. So the adjustments in Europe will continue for a while.”
The Association of German Pfandbrief Banks (VDP) recently confirmed price drops in this country like never before: At the end of 2023, the VDP recorded historically strong declines in prices for commercial properties, with a price drop of 12.1 percent compared to the same period in the previous year and 4.9 percent compared to the previous quarter.
Billions of the German bank are in US commercial real estate
The crisis has now also reached German banks. Some of them have an above-average exposure to the US commercial real estate market, Campa told the newspaper. However, the EBA boss would not speak of “stupid German money”. “There is a surplus of savings deposits in Germany. That’s why it’s logical that German banks have to invest outside Germany. Sometimes they make good investment decisions, and sometimes they make worse ones.”
Deutsche Pfandbriefbank had to increase its risk provisions against crises last quarter and recently tried to reassure investors with a statement on its liquidity position. Deutsche Bank is comparatively heavily involved in the American commercial real estate market. It has granted loans for around 17 billion euros for US commercial real estate, 7 billion of which for offices. The financial institution will be able to cope with defaults on loans for US commercial real estate, CFO James von Moltke recently said. However, they are likely to be higher in the first and probably second quarter than Deutsche Bank would like. At the same time, the institute pointed out that the US office portfolio only makes up 1.5 percent of the entire loan book.
It was only at the end of January that the Federal Financial Supervisory Authority (Bafin) warned of increasing risks for highly specialized banks due to falling prices for commercial property. Prices and valuations have risen over many years, and real estate portfolios have grown at many credit institutions, according to the published report “Risks in Focus 2024”. Now prices are falling, lending is stalling and the value of loan collateral is under pressure.