ECB says commercial real estate is a weakness in euro zone finance

FRANKFURT – Commercial real estate has become a weak link in the euro zone's financial system, and losses there could hurt banks, insurance companies and funds, a European Central Bank report found on Thursday. Ta.

Commercial real estate companies are being hit by a triple whammy: higher borrowing costs, reduced demand for office space after the pandemic and soaring prices for building materials.

The ECB said in its bi-annual “Financial Stability Review” that their problems were now beginning to spread to their backers in the form of rising loan default rates and impending investment losses.

The central banks of the 20 euro member countries said commercial real estate prices were down 8.7% year-on-year at the end of 2023 and could fall further.

“Prices could fall further given the structural decline in demand for some CRE assets post-pandemic,” the ECB said. “The outlook for the office market is particularly bleak.”

The sector struck a sour note amid an otherwise more positive FSR, with the ECB noting that the risk of recession had declined despite lingering geopolitical risks.

The central bank said around half of the euro zone's big property companies were losing money, severely reducing their ability to pay interest out of profits.

Although commercial real estate accounts for only a small portion of total lending, the ECB said a “small number of banks” were already experiencing “significant deterioration in their CRE portfolios,” particularly in the US. Ta.

The drop in real estate valuations is likely to force banks to raise their provisions, “which in some cases could lead to a reduction in capital,” the ECB added.

Similarly, the ECB noted that despite the significant decline in real estate prices, the reported net asset values ​​of real estate investment funds have remained stable, suggesting that losses have not yet been recorded.

“These losses could trigger REIF redemption claims and put stress on capital buffers,” the ECB said.

Insurers, on the other hand, may lose money on REIF investments that they increased during previous years of low interest rates and a booming real estate market.

“The interconnectedness of commercial real estate exposures across the financial system therefore deserves continued monitoring,” the ECB said.

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