Most European banks wary of commercial real estate lending
A LARGE number of European banks is sceptical of commercial real estate next year, potentially worsening the fallout from a slump in the asset class, according to a top regulator.
A semi-annual survey by the European Banking Authority (EBA) found that three-quarters of banks plan to decrease or keep their exposure to such borrowers at a constant level. More than 60 per cent of responding banks also expect the quality of commercial real estate loans to deteriorate, the EBA said.
Commercial real estate has been one of the asset classes hit hardest by a rapid increase in interest rates as developers also face lower demand for office space in the post-pandemic era. The EBA compared a slump in the number of transactions in the industry to rates seen during the 2008 financial crisis and said “price corrections have gathered pace” in Nordic countries and in Germany.
A broad slowdown in the economy and tighter credit would pose a further burden, the EBA said. Indebted investors could be forced to sell properties “adding downward pressure on prices and exposing non-mitigated risks related to a liquidity mismatch in real estate investment funds,” the authority said.
Citing “anecdotal evidence,” the EBA said banks are seeing increased demand for loans from commercial real estate borrowers to replace maturing debt. “This is also because refinancing debt through capital markets became challenging,” according to the report.
European banks had 1.4 trillion euros (S$2.02 trillion) of exposure to commercial real estate in July, the EBA said. Loan-to-value ratios, a key metric lenders use to determine their potential losses, are “robust” and provide a cushion in case of a deeper correction, it said.
Still, almost 160 billion euros of commercial real estate loans had a LTV of more than 100 per cent, according to the report.
The EBA said 85 banks responded to its survey in August and September. BLOOMBERG
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