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Commercial Real Estate: Europe: Difference between revisions
→Loans Performance
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* Averse developments in CRE markets lead to a tightening of credit conditions, thereby reducing new investment in the economy. | * Averse developments in CRE markets lead to a tightening of credit conditions, thereby reducing new investment in the economy. | ||
* CRE investments by investment funds can affect financial stability when the funds are subject to redemption risks, and liquidity needs under stressed market conditions lead to fire sales. | * CRE investments by investment funds can affect financial stability when the funds are subject to redemption risks, and liquidity needs under stressed market conditions lead to fire sales. | ||
* Banks have not sufficiently performed sensitivity analyses on CRE exposures, especially to measure the potential impact of an increase in interest rates. As a result of these weaknesses, the affordability of some borrowers may not be as robust as banks had originally assumed. | * Banks have not sufficiently performed sensitivity analyses on CRE exposures, especially to measure the potential impact of an increase in interest rates. As a result of these weaknesses, the affordability of some borrowers may not be as robust as banks had originally assumed. | ||
* There could be o significant asset value overstatement due to shortcomings in collateral valuation. | * There could be o significant asset value overstatement due to shortcomings in collateral valuation. | ||
* In most countries default rates for CRE loans are higher than those for the stock of loans in other segments of the economy. Germany share of CRE NPLs is 30%, with a 10% exposure of total loans. EU at 15% share. | * In most countries default rates for CRE loans are higher than those for the stock of loans in other segments of the economy. Germany share of CRE NPLs is 30%, with a 10% exposure of total loans. EU at 15% share. | ||
* Investment funds act as buyers in the bulk of CRE transactions, with a share of around 50%. Private investors account for just over 30% of total transaction value, followed by insurers and pension funds, which account for about 10%. Banks only account for a very small share. | * Investment funds act as buyers in the bulk of CRE transactions, with a share of around 50%. Private investors account for just over 30% of total transaction value, followed by insurers and pension funds, which account for about 10%. Banks only account for a very small share.[[File:CRE3.PNG|thumb|Distribution of current LTV ratios]] | ||
* Banks are then exposed to CRE markets (i) via credit risk on CRE loans and changes in values of CRE collateral and (ii) as lenders for investment funds. | |||
* Looking at total exposures (investment in CRE and CRE loans) by investor type, banks have the highest exposure to CRE in most countries. | * Looking at total exposures (investment in CRE and CRE loans) by investor type, banks have the highest exposure to CRE in most countries. | ||
* The assets under management of real estate alternative investment funds (AIFs) increased by €597 billion in the first quarter of 2017 to €1.06 trillion in the third quarter of 2021. | * The assets under management of real estate alternative investment funds (AIFs) increased by €597 billion in the first quarter of 2017 to €1.06 trillion in the third quarter of 2021. | ||
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===== Collateral stretch ===== | ===== Collateral stretch ===== | ||
* Income returns have trended downward | * Income returns have trended downward[[File:CRE4.PNG|thumb|Share of interest rate schemes for CRE loans by interest type]] | ||
* Low-frequency asset valuations increase valuation uncertainty during periods of market stress. Low-frequency valuation cycles can lead funds to report stable prices for their real estate investments, which could undermine trust in real estate funds’ valuations. | * Low-frequency asset valuations increase valuation uncertainty during periods of market stress. Low-frequency valuation cycles can lead funds to report stable prices for their real estate investments, which could undermine trust in real estate funds’ valuations. | ||
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* The NPL coverage ratio for CRE loans is much lower than that for total loans to NFCs. | * The NPL coverage ratio for CRE loans is much lower than that for total loans to NFCs. | ||
* In 14 euro area countries, variable interest loans make up more than 50% of CRE loans | * In 14 euro area countries, variable interest loans make up more than 50% of CRE loans | ||
* Open-ended funds accounting for 31% of the market in terms of NAV showed a misaligned asset-liability maturity structure. | |||
===== Spillover stretch ===== | |||
* Between the first quarter of 2018 and the third quarter of 2022, an average of 30% of investment in EU CRE came from domestic sources, 57% from European sources other than domestic and 13% from outside Europe | |||
* Euro area banking sector exposures to CRE are mostly domestic, with only a few countries being significantly exposed to CRE markets in other euro area countries | |||
* Currently, more than 60% of CRE loans in the euro area are not securitized | |||
* Insurance companies, together with pension funds, are the largest investors in real estate funds (40% in total), followed by households (15%). Long-term investors can help ensure that investment funds have stable funding structures and thus reduce the risk of large-scale fund redemptions. | |||
* This implies that in the event of a CRE market downturn, spillover effects could arise among funds, banks, and financial auxiliaries within the same jurisdiction. However, there are significant cross-border linkages among a few countries. | |||
https://www.scopegroup.com/dam/jcr:e375322a-3fdf-4cbf-8e65-8a39cdd10763/Scope%20Ratings%20-%20European%20CMBS%20under%20pressure%20Mar%2021%202023.pdf | https://www.scopegroup.com/dam/jcr:e375322a-3fdf-4cbf-8e65-8a39cdd10763/Scope%20Ratings%20-%20European%20CMBS%20under%20pressure%20Mar%2021%202023.pdf | ||