German’s top bank watchdog warned that lenders with large exposures to commercial real estate are in store for more pain as valuations for such assets are set to tumble further.
The current troubles of real estate investors and developers mean they will seek to sell more properties, extending the slump in the asset class, Mark Branson, the president of BaFin, said at a conference in Frankfurt on Monday.
“This market, especially in office and retail, will remain under a lot of pressure and result in losses for banks,” Branson said.
German banks have already started to set aside money for losses on commercial real estate loans as real estate companies such as Adler Group SA struggle under a debt load built up when benchmark interest rates were still negative. Bloomberg reported earlier this month that European bank regulators are monitoring the difficulties besetting the empire of Austrian mogul Rene Benko, which includes prime commercial real estate from Hamburg to Berlin and Munich, as they eye theoretical ripple effects across commercial real estate markets.
Commercial real estate has been one of the assets hit hardest by a rapid increase in interest rates as developers face a surge in borrowing costs as well as shifts in behavior that started in the pandemic. The industry has also seen a drought of deals for over a year now, making it hard to know whether the values banks record in their loan book are accurate.
Branson said that while the developments in commercial real estate won’t spark a crisis, banks with higher exposures to the sector could face more difficulties. He didn’t name any banks or real estate companies.
Speaking earlier at the conference, Thomas Gross, the chief executive officer of German lender Landesbank Hessen-Thueringen, said commercial real estate is suffering from writedowns and high refinancing costs.
“This phase isn’t a question of weeks and months,” said the CEO of the bank more commonly known as Helaba. “We assume that this will stretch toward 2025, so the next 12 to 18 months.”
