The pandemic had actually manifold influence on societies, business, economies more broadly and many other parts of life. This consists of the working environment which has changed significantly considering that the pandemic, affecting workplaces and workplaces. Significant changes in intake have actually also taken place affecting shopping experience. Nearly all of these modifications have actually had an effect on the CRE market. For example, workplace job rates have actually increased in some European cities, as less workers commute to offices every day. [1] At the very same time, vacancy rates of retail shopping buildings also increased due to the fact that of lower demand for physical stores. To add to these difficulties, the CRE sector is likewise confronted with other structural changes consisting of climate shift threats, with the pressure to move to more sustainable and more energy-efficient buildings. Cyclical developments have likewise had an influence on the CRE market. Tighter financial conditions and the abrupt boost in loaning expenses have made refinancing existing debt more challenging for CRE companies, while inflation has actually contributed to increasing building expenses for new developments. Anecdotal proof suggests an increased need for bank loans from CRE companies to re-finance or reorganize their growing financial obligation, as access to capital markets funding became increasingly challenging.

As an outcome of these structural and cyclical modifications, CRE companies have actually become increasingly inspired to raise capital through asset sales, frequently at a discount rate, either to manage refinancing threat or lower pressure from leverage. Although the stabilisation of loaning expenses, lower inflation expectations and the flattening of risk-free yields might minimize the upward pressure on yield expectations for CRE possessions (e.g. cap rates) [2], spreads between CRE property yields and safe yields remain at heights not seen considering that the monetary relieving started in 2012. All these dynamics are mirrored in a correction in CRE prices. According to the IMF, CRE rates globally dropped by 12% in 2023. [3] The change in CRE costs was more extreme in the US (ca. -23% YoY), while for Europe the correction was around 17%. Nevertheless, this decline seems to have a little alleviated in the very first quarter of 2024. Since its last peak in May 2022 rates were down by around 25% (Figure 52).

Source: Green Street

* The Green Street Commercial Residential Or Commercial Property Price Index is a time series of unleveraged residential or commercial property values across the commercial, workplace, residential, and retail residential or commercial property sectors in 30 of the most liquid European RE markets. The index captures the rates at which CRE transactions are presently being worked out and contracted.

There are, however, large divergences in CRE rates patterns in between countries, in addition to asset classes and places. The rate corrections were, for example, more noticable in Germany and some other northern countries, whereas in other jurisdictions, consisting of Spain and Slovenia, there were not any major corrections in CRE rates. Moreover, while the commercial facilities section showed a certain durability, the office sector broadly suffered a particular rate erosion due to lower income expectations, as a result of a sharp drop in need, particularly for non-prime properties. Residential or commercial property costs in the retail sector tend to be less afflicted than workplace rates, despite the fact that they reveal comparable broad dispersion amongst countries (Figure 53).

Source: BIS Data Portal, ECB Statistical Datawarehouse (SDW), EBA computations

* The choice of the reported nations is not the result of a choice based on significance or representation considerations, but is simply identified by the limited availability of publicly available information on CRE and CRE section prices for private jurisdictions. The countries reported are undoubtedly those for which comprehensive data can be found on the BIS Data Portal or ECB SDW website.

Market data also recommends that the mix of cyclical and structural challenges dealt with by the CRE sector has actually triggered European real estate financial investment trust (REIT) share costs to normally decline over the last 2 years, compared to pre-pandemic levels. The modifications were substantial across all REITs and shown, at least in part, the trends observed in different CRE segments and in different nations. Nonetheless, in the very first months of 2024, the share cost of even those funds that had actually experienced a wider downward correction would appear to have actually stabilised at somewhat higher levels, albeit at much lower levels from those prior to Covid-19 (Figure 54).

Source: S&P Capital IQ

* Abbreviations of REIT names: LI-Kleppiere, CAST-Castellum, MONT-Montea NV, TEG-TAG Immobilien, COVH-Covivio, GFC-Gecina, CAI-CA Immo. These REITs are examples and may be considered for indicative patterns of different CRE sections and various nations. They likewise acquire idiosyncratic risks, for which reason they can not be considered as totally representative, though. Kleppiere tends to concentrate on the shopping center section; Castellum is a REIT in the Nordics; TAG Immobilien is a REIT with a concentrate on German genuine estate; Montea tends to focus on logistics property; Covivio tends to concentrate on the hotel sector; Gecina tends to concentrate on Paris in the residential/student houses sector; CA Immo is an Austrian RE company with investments in picked CEE countries. This details is indicative only.

Banks in the EU/EEA have considerable CRE direct exposures

EU/EEA banks have more than EUR 1.4 tn of loans collateralised by CREs, which accounts for close to 23% of the total loans towards NFCs (or 11% of overall loans if household loans are included). CRE-related direct exposures were less than EUR 1tn in 2014, signalling a more than 40% increase in these exposures within less than a decade (4.2% yearly growth rate). Although loan development had slowed post-pandemic (2.9% annual development rate), and was even slower in 2023 (2.2%), it remained above other sectors. This was the highest development rate for NFC-related exposures. This may suggest that, regardless of banks' tightening of loaning standards, the sector has stepped up to fill to some level the funding gap that CRE firms may have faced on capital markets or the like (see Chapter 2.1). Anecdotal evidence shows that banks have been more going to support existing customers by re-financing financial obligation than offering credit facilities to new clients. This is broadly confirmed by the EBA's RAQ results, which reveal that most of banks expect their CRE portfolio to remain steady. However, around 30% of the banks reported their intention to increase their exposures to CREs, while around 20% indicate their plan to deleverage their portfolio from CRE-related loans (Figure 8 and Figure 55).

Usually, EU/EEA banks' CRE direct exposures are less than 100% of their equity. However, a number of banks, mainly smaller in size, have CRE exposures that reach multiple times their equity, that makes them progressively susceptible to downturns in CRE markets. These banks are mainly specialised CRE lenders, and for that reason have a large part of their loan portfolio geared towards CRE firms. They also tend to be smaller sized in size. Focusing on the significance of CRE direct exposures by bank, out of the 10 banks with the largest loan portfolio volumes just 1 bank reported CRE direct exposures of more than 20% of its overall loans. The share of CRE direct exposures to total loans is a proxy of possible distinctive risks. Although banks domiciled in France and Germany reported the biggest direct exposure, going beyond EUR 280bn, followed by banks in the Netherlands that reported EUR 175bn, only German banks reported a raised share of their overall customer loaning towards CREs. However, banks in smaller jurisdictions likewise reported a higher share of their overall lending being towards CREs. This is especially obvious in banks in eastern European nations and a few southern European countries which had reasonably high direct exposures to CREs. The Baltics, Bulgaria, Cyprus, Iceland, and Germany were among the countries with raised CRE exposures, reporting more than 20% of their total customer loans being towards CREs (Figure 56).

* For Swedish banks, the decline can to a large extent be discussed by a modification in the classification of loans by one of particular banks. Since 31 December 2022 (and afterwards), CRE exposures do no longer consist of loans collateralised by residential immovable residential or commercial property. Before that date, loans collateralised by property stationary residential or commercial property were consisted of in CRE exposures for this bank.

The performance of CRE loans is not only defined by the kind of the hidden possession, such as workplace or retail etc., but is also dependent on its location. Although the correction in European CRE prices has actually been notable, in other places it was even more severe, as revealed above. More than EUR 200bn of CRE-related exposures were towards non-EEA-domiciled counterparties. German, Spanish and Dutch banks reported the greatest non-EEA exposures. Of these, EUR 75bn were towards counterparties domiciled in the US, and EUR 30bn to UK counterparties. German banks reported more than EUR 50bn US CRE direct exposures, while Dutch banks reported around EUR 10bn. These were focused in a small number of banks, intensifying the prospective distinctive risks. A number of these banks have increased significantly their provisioning levels versus these exposures in the last quarters (Figure 57).

Source: EBA supervisory reporting information

Loan-to-value ratios provide a preliminary guard against collateral evaluation correction, yet banks should make sure precise and updated assessments and prudent risk management

The banks that provide to CREs rely on the value of particular residential or commercial properties as security to safeguard them from loan losses when the lenders default. However, if the value of the CRE security drops significantly, the chances for a complete loan healing might worsen and might feed into an adverse loop. As such, the effect of aggravating conditions in the CRE market on banks goes beyond their direct exposures to CRE companies only.

One essential metric used to assess the threat associated with CRE loans is the loan-to-value (LTV) ratio. The LTV ratio represents the portion of the loan quantity relative to the evaluated value of the residential or commercial property. CRE loans frequently come with a decent cushion versus residential or commercial property price declines due to their relatively low LTV ratios. This protective cushion is particularly important throughout economic downturns or market corrections. EU/EEA banks reported that around 63% of CRE exposures have an LTV of less than 60%. These loans provide a buffer for banks in case of unfavorable market conditions. Yet, close to EUR 160bn of CRE loans have an LTV of more than 100%. This suggests that the loan quantity exceeds the assessed worth of the residential or commercial property. The greatest concentration of 'high LTV values' is reported in main and eastern European nations. These loans pose a higher threat to banks if residential or commercial property rates decrease and for that reason banks require to particularly closely monitor their exposure to high LTV loans, especially in areas where such loans prevail (Figure 58).