Recent global events have sparked fears of a commercial real estate crisis in Europe, mirroring situations in Japan and the US. Notably, Deutsche Pfandbriefbank AG faces significant downturns due to the real estate market's weakness.
The past week has witnessed significant downturns in the stock values of several banks worldwide, particularly those with substantial exposure to commercial property loans.
Mirroring unsettling developments in Japan and the United States, Europe is now facing the prospect of an emerging commercial real estate crisis.
Some senior officials at the European Central Bank say Germany will inevitably be a special focus as they examine CRE risks at banks across the region.
“There is more pain to come in real estate valuations, so what does that mean for lenders and does that mean there is the potential for a crisis?”
German banks have the most commercial real estate loans in the European Union, along with their French peers, but they have classified a relatively small portion of those loans as non-performing. Recently, however, that share has been rising while it declined in several other countries.
“This is definitely not just a US problem,” said Valeriya Dinger, a professor of economics at Germany’s University of Osnabrueck. “I wouldn’t be surprised if we see a wave of loan loss provisions for German banks on their domestic commercial real estate exposure,” she said, even if there’s no systemic risk.
German property values are particularly vulnerable to higher borrowing costs because capitalization rates — or the potential return on a real estate investment — were pushed lower there than in other markets during the cheap money era. That reflected in part the fact that yields on German government bonds, a benchmark for investors, were negative at the time.
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