European banks expect deterioration in commercial real estate credit

European banks expect some deterioration in credit granted to commercial real estate (CRE) as the sector continues to face challenges, according to an analysis by rating agency DBRS.

These include the rapid increase in interest rates, more restricted credit granting, weaker demand, and the costs of taller construction.

This exposure is considered manageable as it represents 8% of total credit, with some Nordic countries and Germany well above the average.

The office segment which accounted for 28% of total commercial real estate exposure, followed by multifamily, retail and industrial/logistics.

On average, in 2022, the value of commercial properties fell by 13%, and, despite some recovery in H1 2023, there may be a slowdown in prices in the future.

Banks have become more prudent as lending standards for CRE have tightened. On average, the loan-to-value for the entire CRE portfolio was reported at 52%, with a small portion of exposures above 70%.

DBRS predicts that the office sector is likely to continue to be most under pressure as many workers have switched to remote or hybrid working models.

Faced with high interest rates and difficulties in obtaining credit, investors could be led to sell commercial spaces at a discount, increasing pressure on the sector.

The DBRS analysis considered a sample of 48 European financial institutions that disclosed data and/or commercial real estate exposure information in their Q2 earnings presentations.


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