Amidst investor concerns about lenders’ ability to handle risk and a sharp decline in office prices on both sides of the Atlantic, European banks have around 1.4 trillion euros ($1.50 trillion) in loans to the ailing commercial real estate sector.

Germany is experiencing its worst real estate crisis in decades, characterised by bankruptcies, delayed building, and a freeze on real estate transactions. As a result, banks have come under special scrutiny. Last week, investors sold off shares of one of Germany’s leading real estate financiers due to worries about its exposure to the US market.

Among the largest lenders of commercial real estate in Europe, banks in France and the Netherlands may also be impacted by the fallout from the crisis.

The real estate market’s current situation, the banks with the most exposure, and the forecast are described below:

Where Are Commercial Real Estate Prices Going?

This Monday, the VDP banking group reported that commercial property values in Germany, the largest economy in Europe, fell by 10.2% in 2023. The average decline in the euro area has been similar, according to figures from the European Central Bank.

Around a fifth of Germany’s output came from the real estate industry, which attracted billions of euros in property due to low loan rates.

Nevertheless, as bank financing disappears, negotiations halt, and prices decline, increased interest rates and growing development expenses have forced some developers into bankruptcy.

Fears of a global recession have been stoked in the United States’ commercial real estate industry by decreasing office occupancy, increased interest rates, and refinancing challenges.

Industry analysts predict further price declines. Due to asset managers’ sluggishness in revaluing their holdings and owners’ unwillingness to sell at lower prices, there is now little pricing transparency.
“Valuations remain very high. Everyone is aware of it. However, people have to let up at some point, according to Alexandre Grellier, the creator of Drooms, a company that offers services to real estate brokers.

The extent to which banks are impacted depends on how much the market declines. For example, several German real estate companies anticipate a rebound by the middle of this year, while other executives see a continuing decline that would go until 2025.

What German Banks Are Most at Risk?

According to figures from the European Banking Authority, German lenders have lent 285 billion euros in commercial property, or around 5% of the 1.4 trillion euros that EU banks have lent to the industry.
The largest bank in Germany, Deutsche Bank (DBKGn.DE), has the highest amount of outstanding loans to the industry, with two state-backed Landesbanken following closely after.

More than 3% of Deutsche’s total book value, or 17 billion euros, was revealed earlier this month as loans to the severely damaged U.S. commercial real estate market. Based on EBA figures, that would represent approximately 5% of the 76 billion euros that EU banks have lent in the US overall.
What is the current state of Pfandbriefbank?

One of Germany’s leading real estate financiers is Deutsche Pfandbriefbank (PBB), which was established more than ten years ago following the global financial crisis.

According to PBB, it has 5 billion euros, or 15% of its loans, invested in the US commercial sector.
Investors became alarmed after it raised its risk provisions last week, selling its bonds and shares as short sellers pounced.

PBB responded by attempting to reassure the public about its health through two distinct announcements.
Due to its ties to commercial real estate, S&P downgraded PBB late on Wednesday and assigned it a negative outlook.

Credit rating agency Moody’s stated in a study on Wednesday that the majority of EU banks, with the exception of German banks, have no direct exposure to U.S. commercial real estate.

What Concerns Banks in Other Parts of Europe?

According to EBA data, certain European banks are even larger than German banks when it comes to financing for commercial real estate, with France and the Netherlands leading the way. Top on the list are BNP Paribas and Rabobank.

According to EBA data, loans from French banks to the sector are marginally higher than those from German banks; the Netherlands ranks third, ahead of Italy and Spain.

How Do Things Look?

Numerous experts see the situation as dire, but not all European real estate markets are as dire as Germany’s, and an interest rate reduction later this year may offer some respite.

“A trend reversal is not yet in sight for property prices, despite frequent public speculation. The situation will remain difficult for the time being in 2024,” said VDP’s chief executive Jens Tolckmitt.

Despite claiming that the real estate market was too small to pose a systemic danger to lenders, the European Central Bank issued a warning in November that the downturn may linger for years.
Smaller and regional banks, especially in the United States, and nonbank financial intermediaries with significant real estate exposure may have difficulties, according to the International Monetary Fund.
The head of Germany’s financial regulator increased his cautions last month, stating that real estate is becoming riskier and that bank profits will not be as strong in 2024.

(Adapted from Reuters.com)

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