The commercial real estate crisis that originated in the US and affected banks in New York and Japan has now spread to Europe, causing concern about broader contagion.
German bank Deutsche Pfandbriefbank AG’s bonds have plummeted due to concerns about its exposure to the commercial real estate sector. The bank issued a statement describing the current turmoil as the “biggest housing crisis since the financial crisis.”
Rising interest rates have led to an increase in provisions on debts extended to property owners and developers, as loans begin to sour. In the U.S., the slow return to office work after the pandemic has significantly impacted the value of offices. Analysts predict that further depreciation of up to 15% could be necessary this year, especially in the U.S.
Moody’s Investors Service downgraded New York Community Bancorp to “junk” due to real estate problems. Japanese bank Aozora Bank posted its first loss in 15 years, attributing it to provisions on loans made to U.S. commercial properties.
In Europe, Switzerland’s Julius Baer Group Ltd. announced huge loan write-offs made to bankrupt real estate company Signa. Concerns about the scope of the situation are growing, with Morgan Stanley recommending clients sell Deutsche PBB senior bonds.
Despite the challenging situation, Deutsche PBB remains profitable thanks to its financial strength. However, Aareal Bank AG’s bonds have decreased, and concerns have spread to other banks with CRE exposure.
If commercial real estate losses spread to Europe through smaller German banks, it could echo the global financial crisis of 2008. The German Landesbanken have also felt the pain of their exposure to the commercial real estate sector.
As the crisis deepens, banks are bracing for potential further losses, with Raphael Thuin, head of capital markets strategies at Tikehau Capital, warning that there could be more pain to come in commercial real estate.