FRANKFURT – Commercial real estate has become a weak spot in the euro zone's financial system and losses there could hit banks, insurers and funds, a European Central Bank report said on Thursday.
ECB Claims Commercial Real Estate is Eurozone Financial Weakness {{^userSubscribed}} {{/userSubscribed}} {{^userSubscribed}} {{/userSubscribed}}
Commercial real estate companies are suffering a triple whammy of rising borrowing costs, declining demand for office space after the pandemic and soaring prices for building materials.
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The European Central Bank said in its twice-yearly financial stability review that problems at these banks were starting to spread to their backers in the form of rising loan default rates and widening investment losses.
The euro zone's 20-nation central bank said commercial property prices were down 8.7% year-on-year at the end of 2023 and could fall further.
“Prices may fall further given the structural weakness in demand for some CRE assets since the pandemic,” the ECB said, adding that “the outlook for the office market is particularly gloomy.”
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The sector was a dark spot in an overall more positive FSR, in which the ECB noted that recession risks had declined despite remaining geopolitical risks.
The central bank said around half of the euro zone's largest property companies were making losses and their ability to pay interest from their profits was severely reduced.
While commercial real estate only accounts for a small proportion of total lending, the ECB said a “handful of banks” have already experienced a “significant deterioration in their CRE portfolios”, particularly in the United States.
The ECB added that the fall in property valuations could force banks to increase their provisions and “in some cases lead to a reduction in capital”.
Similarly, the ECB noted that despite the large fall in property prices, the reported net assets of real estate investment funds have remained stable, suggesting that no losses have yet been booked.
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“Such losses could trigger redemption calls from the REIF and put strain on its cash buffers,” the ECB said.
Meanwhile, insurers could face losses on investments in REIFs that they increased during a time of low interest rates and a booming real estate market.
“The interconnectedness of commercial real estate exposures across the financial system therefore requires ongoing monitoring,” the ECB said.
This article has been generated from an automated news agency feed without any modifications to the text.
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