The European Central Bank warned on Tuesday that the collapsing commercial real estate market in the euro zone would struggle for years, endangering the banks and investors that financed it.
An ECB report on risks to financial stability highlighted growing anxiety over a real estate bubble that is currently busting in nations like Sweden and Germany.
The ECB stated that the past year has seen a decline in commercial property values due to the sluggish economy and high interest rates, which has put the sector's profitability and business model in jeopardy.
Although the industry is too small to pose a systemic danger to lenders, it might intensify shocks to the whole financial system and have a significant effect on financial institutions that are collectively referred to as "shadow banks," including insurance companies and investment funds.
"While the relatively limited size of bank commercial real estate portfolios implies that they are unlikely on their own to lead to a systemic crisis, they could play a significant amplifying role in the event of broader market stress," the ECB said in a Financial Stability Review report.
The largest economy in the euro zone, Germany's real estate sector, began to show serious fractures at the same time the ECB released its report. A few developers have been forced into insolvency and negotiations and construction have been put on hold due to the abrupt reversal in interest rates.
In yet another worrying indication, the developer of one of Germany's tallest buildings has abruptly ceased paying its contractor, causing the project to abruptly stop in the middle of construction.
The 64-story Elbtower skyscraper in Hamburg, which is owned by the Austrian real estate behemoth Signa Group, which was founded by René Benko, has been steadily moving forward this year. However, the company fell behind on payments.
According to someone with knowledge of the situation, Austrian banks were exposed to Signa Group for 2.2 billion euros ($2.4 billion) in mid-2023.
The source, who wished to remain anonymous, claimed that two-thirds of this came from Raiffeisen Bank International and Bank Austria of UniCredit.
As per the European Central Bank's study, around 30% of bank loan books consist of residential mortgages, and commercial real estate (CRE) makes up the remaining 10%.
"A negative outcome of this type would also drive large losses in other parts of the financial system which are significantly exposed to CRE, such as investment funds and insurers," it added.
Compared to the same period in 2022, there was a 47% decrease in commercial real estate transactions in the first half of 2023.
It is difficult to determine how much prices have plummeted because of this, but according to the ECB, the biggest listed landlords in the EU are trading at a discount of more than 30% to net asset value, which is the highest since 2008.
According to a sample of bank loans given to real estate companies, the percentage of loans given to businesses that are losing money could increase to as much as 26% as a result of the recent increase in financing expenses.
This figure would rise to 30% if the markets' anticipated two years of tighter financing conditions hold true and businesses are forced to roll over all loans that are about to mature.
"There are substantial vulnerabilities in this loan book, particularly when considering that it is expected that both higher financing costs and reduced profitability will persist for a number of years," the ECB said.
"Business models established on the basis of pre-pandemic profitability and low-for-long interest rates may become unviable over the medium term."
(Source:www.investing.com)
An ECB report on risks to financial stability highlighted growing anxiety over a real estate bubble that is currently busting in nations like Sweden and Germany.
The ECB stated that the past year has seen a decline in commercial property values due to the sluggish economy and high interest rates, which has put the sector's profitability and business model in jeopardy.
Although the industry is too small to pose a systemic danger to lenders, it might intensify shocks to the whole financial system and have a significant effect on financial institutions that are collectively referred to as "shadow banks," including insurance companies and investment funds.
"While the relatively limited size of bank commercial real estate portfolios implies that they are unlikely on their own to lead to a systemic crisis, they could play a significant amplifying role in the event of broader market stress," the ECB said in a Financial Stability Review report.
The largest economy in the euro zone, Germany's real estate sector, began to show serious fractures at the same time the ECB released its report. A few developers have been forced into insolvency and negotiations and construction have been put on hold due to the abrupt reversal in interest rates.
In yet another worrying indication, the developer of one of Germany's tallest buildings has abruptly ceased paying its contractor, causing the project to abruptly stop in the middle of construction.
The 64-story Elbtower skyscraper in Hamburg, which is owned by the Austrian real estate behemoth Signa Group, which was founded by René Benko, has been steadily moving forward this year. However, the company fell behind on payments.
According to someone with knowledge of the situation, Austrian banks were exposed to Signa Group for 2.2 billion euros ($2.4 billion) in mid-2023.
The source, who wished to remain anonymous, claimed that two-thirds of this came from Raiffeisen Bank International and Bank Austria of UniCredit.
As per the European Central Bank's study, around 30% of bank loan books consist of residential mortgages, and commercial real estate (CRE) makes up the remaining 10%.
"A negative outcome of this type would also drive large losses in other parts of the financial system which are significantly exposed to CRE, such as investment funds and insurers," it added.
Compared to the same period in 2022, there was a 47% decrease in commercial real estate transactions in the first half of 2023.
It is difficult to determine how much prices have plummeted because of this, but according to the ECB, the biggest listed landlords in the EU are trading at a discount of more than 30% to net asset value, which is the highest since 2008.
According to a sample of bank loans given to real estate companies, the percentage of loans given to businesses that are losing money could increase to as much as 26% as a result of the recent increase in financing expenses.
This figure would rise to 30% if the markets' anticipated two years of tighter financing conditions hold true and businesses are forced to roll over all loans that are about to mature.
"There are substantial vulnerabilities in this loan book, particularly when considering that it is expected that both higher financing costs and reduced profitability will persist for a number of years," the ECB said.
"Business models established on the basis of pre-pandemic profitability and low-for-long interest rates may become unviable over the medium term."
(Source:www.investing.com)
