Recent global events have raised fears of a commercial real estate crisis in Europe, following in the footsteps of Japan and the U.S. In particular, Deutsche Pfandbriefbank is facing a significant downturn due to the weakness of the real estate market.
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Last week saw share prices for several banks around the world fall sharply, particularly those with significant exposure to commercial real estate loans.
Mirroring worrying developments in Japan and the United States, Europe now faces the possibility of an emerging commercial real estate crisis.
America's Prologue: Warning Signs
In the US, things have developed in a worrying direction, with New York Community Bancorp (NYCB) becoming a focal point of market anxiety.
NYCB, which has assets of more than $100 billion (€92 billion), around 60% of which are linked to Manhattan commercial real estate, saw its shares fall more than 50% from their late January levels after a surprise fourth-quarter loss and disappointing earnings figures sparked a dramatic sell-off in the market.
European banks under scrutiny?
The European banking sector is now facing similar scrutiny, with Deutsche Pfandbriefbank (PBB), the Bavarian state bank that specializes in commercial real estate finance and has been in business for more than a century, being particularly affected this week.
The bank announced risk provisions totalling 210-215 million euros due to “persistent weakness in the real estate market”, which the bank described as “the biggest real estate crisis since the financial crisis”.
PBB's share price has fallen 17% over the past four days, with the company's subordinated bonds (ISIN: XS1808862657) falling to below 40 cents on the dollar. While this decline is severe, it is somewhat mitigated by PBB's relatively modest market capitalization of €628 million.
Growing concerns about European commercial real estate
Both the European Central Bank (ECB) and ratings agency Moody's have expressed significant concerns about the stability of Europe's commercial real estate sector.
In its latest Financial Stability Review, published in November, the ECB highlighted the persistent decline in commercial property prices, exacerbated by a market downturn that is severely affecting the price discovery process.
The ECB also detailed a worrying decline in transaction activity in the commercial real estate market, which experienced a dramatic 47% drop in the first half of 2023 compared to the same period in 2022.
Moreover, the European Central Bank warned that a damaging combination of rising financing costs and falling rental income could lead to repayment problems.
In its August 2023 warning, Moody's identified several key factors that will exacerbate the sector's challenges, many of which reflect issues facing the U.S. market, such as the adoption of hybrid work models and longer-term changes in demand for office property caused by increased environmental regulations.
Focus on Europe's largest office REIT
Amid these developments, market focus may shift to Europe's largest office real estate investment trust (REIT).
Gecina (GFC) boasts one of Europe's leading office portfolios, approximately 97% of which is located in the Paris region and is valued at €22 billion.
Inmobiliaria Colonial, SOCIMI, SA is a Spanish listed REIT focused on the prime European office market with operations in Barcelona, Madrid and Paris. It has a prime office portfolio valued at over €12 billion.
Derwent London is the largest London-focused office REIT with a portfolio of 66 commercial properties primarily in Central London and a valuation of over €6 billion as at 30 June 2023.