FRANKFURT, Nov 21 (Reuters) – The European Central Bank said on Tuesday the euro zone’s commercial property market could struggle for years, putting bank loan books, investment funds and insurance companies at risk. .
Due to the economic downturn and high interest rates, real estate prices have fallen over the past year, reducing the profitability of real estate companies and even challenging the commercial real estate market’s business model.
Although the sector is not large enough to pose a systemic risk to lenders, it could send shockwaves through the financial system and have a major impact on financial companies, from investment funds to insurance companies, collectively known as shadow banks.
“While the relatively limited size of banks’ commercial real estate portfolios suggests that they are unlikely to cause a systemic crisis on their own, they are unlikely to cause a systemic crisis in the event of broader market stress. “Portfolios may play an important amplifying role,” the ECB said in its report on financial stability. Overview.
Residential loans account for approximately 30% of bank loan balances, while commercial real estate accounts for approximately 10%.
“This type of negative outcome would also lead to huge losses for other parts of the financial system that are heavily affected by CRE, such as investment funds and insurance companies.”
Commercial real estate transactions in the first half of 2023 were down 47% compared to the same period last year.
As such, it is difficult to say how much prices have fallen, but the region’s largest listed landowners are trading at more than a 30% discount to net asset value, the largest such discount since 2008. the ECB said.
The report said the example of bank loans to real estate companies suggests that due to recent increases in funding costs, the proportion of loans to loss-making companies could double to as much as 26%. .
If, as the market expects, tighter funding conditions continue for two years and companies are required to roll over all maturing loans, this number will rise to 30%.
“There are significant vulnerabilities in this loan book, especially given that rising financing costs and declining profitability are expected to persist in the coming years,” the ECB said.
“Business models built on pre-pandemic profitability and long-term low interest rates may not be viable in the medium term.”
Report by Balazs Koranyi.Editing: Barbara Lewis
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