ECB warns of eurozone banking exposure to property sector

European Central Bank (ECB) Banking Supervision identified banks’ exposure to commercial (CRE) and residential real estate (RRE) as one of the top vulnerabilities in a risk assessment by the European Central Bank. for the years between 2022 and 2024, published this Friday (18)

Regarding the commercial real estate sector, the exposure of banks is “substantial”, says the ECB. About 8% of all supervised banks’ loans and 20% of their corporate loans are sector-linked.

In absolute values, exposure is “particularly high” in Germany, France and Italy, the ECB points out. While in other countries, it is relatively more robust, with 40% of total corporate lending linked to commercial real estate in Estonia, Slovenia and Cyprus.

ECB supervisors considered the European commercial real estate sector to be vulnerable, given a number of concerns. The pandemic hit CRE during its peak of a cycle.

“At the start of the pandemic, financial market-based valuations such as real estate investment confidence indices dropped sharply and transaction activity in CRE markets dropped to half of their normal levels, suggesting that risks were starting to mount. materialize in the market”, they observe.

With more people working from home and shopping online, structural changes can happen in the market.

A lower rent, as is expected in the medium term, could weaken the financial position of borrowers and lead to greater credit losses for banks.

Prolonged supply bottlenecks were also highlighted by the ECB, given the resulting cost increases for production.

Banks with a portfolio more exposed to properties under development will therefore be at greater risk, assess the supervisors. The commercial real estate sector is also “highly exposed” to the risks of the climate transition, given the high levels of energy consumption and greenhouse gas emissions.

The residential real estate sector is also being studied, as data confirm the higher demand for related loans.

“The increasing risk of price corrections in eurozone residential property markets and the observed increase in household indebtedness are of concern to supervisors,” says the ECB.

In an effort to investigate how banks might handle such markets, Banking Supervision said it was reviewing a sample of banks with the greatest exposure to the commercial real estate sector.

In relation to residential, the body will include a review of banks with this type of investment in the portfolio.

“Supervisors will scrutinize banks’ solvency assessments and lending standards for newly created residential mortgages and will ask banks to address any shortcomings,” it said in a note.