The pandemic had manifold influence on societies, service, economies more broadly and many other parts of life. This includes the working environment which has actually changed considerably since the pandemic, affecting offices and workplaces. Significant changes in usage have likewise happened affecting shopping experience. Nearly all of these modifications have had an influence on the CRE market. For instance, workplace job rates have increased in some European cities, as fewer workers commute to workplaces daily. [1] At the very same time, job rates of retail shopping buildings likewise increased since of lower need for physical shops. To contribute to these obstacles, the CRE section is likewise challenged with other structural changes consisting of environment shift dangers, with the pressure to move to more sustainable and more energy-efficient structures. Cyclical developments have also had an effect on the CRE market. Tighter monetary conditions and the abrupt boost in borrowing expenses have made refinancing existing financial obligation more tough for CRE firms, while inflation has actually contributed to increasing building and construction costs for new advancements. Anecdotal evidence indicates an increased demand for bank loans from CRE firms to refinance or reorganize their developing debt, as access to capital markets funding became increasingly challenging.

As an outcome of these structural and cyclical modifications, CRE companies have actually ended up being significantly encouraged to raise capital through asset sales, often at a discount, either to manage refinancing threat or minimize pressure from leverage. Although the stabilisation of borrowing costs, lower inflation expectations and the flattening of risk-free yields might lower the upward pressure on yield expectations for CRE assets (e.g. cap rates) [2], spreads between CRE asset yields and safe yields stay at heights not seen considering that the financial alleviating began in 2012. All these dynamics are mirrored in a correction in CRE rates. According to the IMF, CRE rates internationally stopped 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 appears to have a little relieved in the first quarter of 2024. Since its last peak in May 2022 costs 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 worths throughout the commercial, workplace, domestic, and retail residential or commercial property sectors in 30 of the most liquid European RE markets. The index records the rates at which CRE transactions are presently being negotiated and contracted.

There are, however, big divergences in CRE pricing patterns in between countries, in addition to property classes and areas. The price corrections were, for example, more pronounced in Germany and some other northern countries, whereas in other jurisdictions, including Spain and Slovenia, there were not any significant corrections in CRE prices. Moreover, while the industrial properties section revealed a specific strength, the workplace sector broadly suffered a specific price erosion due to lower earnings expectations, as an outcome of a sharp drop in demand, especially for non-prime possessions. Residential or commercial property costs in the retail sector tend to be less affected than office rates, although they show similar wide dispersion amongst countries (Figure 53).

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

* The choice of the reported nations is not the outcome of a choice based on relevance or representation factors to consider, however is simply determined by the limited availability of publicly available data on CRE and CRE section rates for private jurisdictions. The nations reported are undoubtedly those for which comprehensive data can be found on the BIS Data Portal or ECB SDW website.

Market data likewise suggests that the combination of cyclical and structural difficulties faced by the CRE sector has triggered European real estate financial investment trust (REIT) share prices to typically decline over the last 2 years, compared to pre-pandemic levels. The modifications were substantial throughout all REITs and reflected, a minimum of in part, the trends observed in various CRE sectors and in different countries. Nonetheless, in the very first months of 2024, the share price of even those funds that had experienced a more comprehensive down correction would appear to have 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 might be thought about for a sign trends of various CRE sections and various nations. They likewise inherit idiosyncratic threats, for which factor they can not be thought about as totally representative, though. Kleppiere tends to focus on the shopping center section; Castellum is a REIT in the Nordics; TAG Immobilien is a REIT with a focus on German genuine estate; Montea tends to concentrate on logistics realty; Covivio tends to concentrate on the hotel section; Gecina tends to focus on Paris in the residential/student houses sector; CA Immo is an Austrian RE company with financial investments in picked CEE countries. This info is a sign only.

Banks in the EU/EEA have substantial 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 total loans if home loans are included). CRE-related exposures were less than EUR 1tn in 2014, signalling a more than 40% boost in these exposures within less than a decade (4.2% yearly development rate). Although loan development had slowed post-pandemic (2.9% yearly development rate), and was even slower in 2023 (2.2%), it stayed above other segments. This was the greatest growth rate for NFC-related exposures. This may indicate that, despite banks' tightening of loaning requirements, the sector has actually stepped up to fill to some extent the financing gap that CRE firms might have dealt with on capital markets or the like (see Chapter 2.1). Anecdotal evidence indicates that banks have been more happy to support existing customers by refinancing debt than offering credit facilities to new customers. This is broadly verified by the EBA's RAQ results, which show that most of banks anticipate their CRE portfolio to stay steady. However, around 30% of the banks reported their intent to increase their direct exposures to CREs, while around 20% show their strategy to deleverage their portfolio from CRE-related loans (Figure 8 and Figure 55).

On average, EU/EEA banks' CRE direct exposures are less than 100% of their equity. However, several banks, primarily smaller in size, have CRE direct exposures that reach numerous times their equity, which makes them significantly susceptible to slumps in CRE markets. These banks are mostly specialised CRE lenders, and for that reason have a big portion of their loan portfolio tailored towards CRE companies. They also tend to be smaller sized in size. Focusing on the relevance of CRE exposures by bank, out of the 10 banks with the largest loan portfolio volumes just 1 bank reported CRE exposures of more than 20% of its total loans. The share of CRE exposures to overall loans is a proxy of prospective distinctive risks. Although banks domiciled in France and Germany reported the largest 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 sized jurisdictions likewise reported a higher share of their overall financing being towards CREs. This is particularly obvious in banks in eastern European nations and a few southern European countries which had relatively high 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 client loans being towards CREs (Figure 56).

* For Swedish banks, the decline can to a big extent be explained by a modification in the classification of loans by among particular banks. As of 31 December 2022 (and thereafter), CRE exposures do no longer include loans collateralised by property stationary residential or commercial property. Before that date, loans collateralised by residential stationary residential or commercial property were consisted of in CRE direct exposures for this bank.

The performance of CRE loans is not just defined by the kind of the underlying possession, such as office or retail etc., but is also depending on its area. Although the correction in European CRE costs has actually been significant, somewhere else it was a lot more severe, as revealed above. More than EUR 200bn of CRE-related direct exposures were towards non-EEA-domiciled counterparties. German, Spanish and Dutch banks reported the highest 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 little number of banks, exacerbating the possible idiosyncratic threats. A number of these banks have increased considerably their provisioning levels against these direct exposures in the last quarters (Figure 57).

Source: EBA supervisory reporting data

Loan-to-value ratios offer a preliminary shield against collateral assessment correction, yet banks should make sure accurate and up-to-date valuations and sensible danger management

The banks that lend to CREs depend on the value of respective residential or commercial properties as collateral to safeguard them from loan losses when the loan providers default. However, if the value of the CRE collateral drops substantially, the possibilities for a complete loan healing may become even worse and might feed into an unfavorable loop. As such, the effect of intensifying conditions in the CRE market on banks surpasses their direct exposures to CRE companies only.

One crucial metric used to assess the risk connected with CRE loans is the loan-to-value (LTV) ratio. The LTV ratio represents the portion of the loan quantity relative to the evaluated worth of the residential or commercial property. CRE loans often feature a good cushion versus residential or commercial property cost declines due to their reasonably low LTV ratios. This protective cushion is specifically important during financial declines or market corrections. EU/EEA banks reported that around 63% of CRE exposures have an LTV of less than 60%. These loans offer a buffer for banks in case of negative market conditions. Yet, near to EUR 160bn of CRE loans have an LTV of more than 100%. This indicates that the loan amount goes beyond the evaluated worth of the residential or commercial property. The greatest concentration of 'high LTV values' is reported in central and eastern European countries. These loans posture a higher danger to banks if residential or commercial property rates decrease and for that reason banks require to especially carefully monitor their direct exposure to high LTV loans, particularly in regions where such loans are widespread (Figure 58).