As of: February 16, 2024, 5:18 p.m
By: Robert Wallenhauer
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After the rating agencies downgraded Deutsche Pfandbriefbank (pbb), many investors are asking themselves the question: Is the crisis on the office market a danger for domestic financial institutions?
Frankfurt - European banks are facing an ever-increasing problem in view of falling commercial real estate prices.
They have granted loans worth around 1.4 trillion euros to the crisis-ridden industry - and this is increasingly worrying investors.
They worry that banks will have to bear increasing loan defaults.
The focus is primarily on banks in Germany, where prices for commercial real estate fell at a record pace before the turn of the year.
The worst German real estate crisis in decades is characterized by bankruptcies, construction freezes and stalled sales.
Last week, investors sold shares in Deutsche Pfandbriefbank (pbb) because of its involvement in the struggling US office real estate market, and short sellers bet on a fall in the DAX company's share price.
Deutsche Pfandbriefbank (pbb): The rating agency S&P downgraded pbb from BBB to BBB-.
© Timon Schneider/Imago
German construction crisis has an impact on banks
In Germany, prices for commercial real estate fell by 10.2 percent in 2023, according to the banking association VDP.
The real estate sector accounts for around a fifth of economic output in Europe's largest economy.
A similar price decline was seen across the eurozone, according to data from the European Central Bank.
Due to low interest rates in recent years, billions have flowed into the industry.
However, the rapid rise in interest rates and increased material prices are causing severe problems for the real estate and construction industries.
This development has driven some companies into bankruptcy.
Low office utilization in the USA is causing banks to tremble
In the U.S., higher interest rates, refinancing problems and lower office occupancy have also hit the commercial real estate sector hard and fueled fears of a global downturn.
Industry experts expect a further drop in prices.
So far, some owners willing to sell are not prepared to make price cuts.
“Valuations are still too high.
Everyone knows that. But at a certain point people have to let their pants down,” says Alexandre Grellier from Drooms, a service provider for real estate dealers.
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How badly the banks are affected depends on how badly the market collapses.
Many real estate companies in Germany are hoping for a turnaround in the middle of the year, while others expect the crisis to worsen by 2025.
Several German banks are affected
With 285 billion euros in commercial real estate loans, German lenders account for around a fifth of the 1.4 trillion euros in loans from EU banks, according to data from the European Banking Authority (EBA).
In the Federal Republic, Deutsche Bank, as the country's largest financial institution, is also the largest lender for the sector, followed by LBBW, BayernLB and Aareal Bank.
Earlier this month, Deutsche Bank announced that it had lent €17 billion to the struggling US commercial real estate market.
According to the EBA, this corresponds to almost a fifth of the 76 billion euros that EU banks have lent in the USA.
German Pfandbrief bank only close to “junk level”
pbb is one of the largest German real estate financiers and has granted around 15 percent of its loan volume in the USA.
This could cause risk costs to rise more sharply in the next two years than previously thought.
Last Thursday, pbb doubled its risk provisions, scaring investors.
This was followed by a slide in prices on the stock market.
The bank responded with two separate announcements to allay investor concerns.
On Wednesday, the rating agency S&P downgraded pbb's credit rating because of its activities in the USA and spoke of a negative outlook.
“This means that the rating for the institution’s long-term creditworthiness is only one step above the junk level, which stands for relatively risky investments,” writes the
Handelsblatt
.
Most European Union banks are not directly involved in US commercial real estate.
According to a study by the rating agency Moody's, German banks are an exception. The effects of the downturn could nevertheless also affect banks in other countries.
Financial institutions in France and the Netherlands are among the largest European lenders for commercial real estate.
The Dutch institute Rabobank and the French BNP Paribas have granted particularly large amounts of loans for commercial real estate, say EBA data.
Banks will continue to struggle with the weak construction sector in the future
Many experts are painting a bleak picture for the future of the industry, although a rate cut later this year could provide some relief and not all European real estate markets are in as bad shape as Germany's.
“A trend reversal in real estate prices is not in sight, even if there is often public speculation about it,” says the managing director of the Association of German Pfandbrief Banks, Jens Tolckmitt.
The situation will remain difficult for the time being in 2024.
Real estate companies' profits could fall in the coming years, lagging behind rising financing costs, according to a November assessment by the European Central Bank.
However, the monetary authorities gave the all-clear that the sector alone could not cause a systemic crisis.
But it has the potential to act as an amplifier in stressful situations.
The risk of systemically important losses in the banking industry could then increase.
(row with Reuters)