![Banks: the mystery of the real estate crisis Banks: the mystery of the real estate crisis](https://media.lesechos.com/api/v1/images/view/6666914cafcfbc045f1bbf38/1280x720/01101271631840-web-tete.jpg)
The analogy is tempting and the expression has become common language. In France, a “Chernobyl cloud” designates, rightly or wrongly, a danger supposed to threaten an entire population – such as that caused in 1986 by the Chernobyl nuclear accident -, but which the authorities seek to minimize.
In 2024, it is not radioactive particles that could threaten French banks. Rather, it is the financial tensions affecting office towers, shopping centers, or logistics parks, in other words, “commercial” real estate (OR CRE, according to its English acronym), in the United States as in Europe.
The subject appeared in mid-May in the ECB’s financial stability review, which without dramatizing, explained that “the current turnaround in the real estate market, particularly in commercial real estate could have cascading effects on the quality of assets banks” of the euro zone.
Until 2022, office towers and businesses were financed without any particular difficulty, thanks in particular to very cheap bank financing. But with the rise in rates, undertaken by the major central banks in 2022, new financing has become rarer and more expensive. Especially since loan repayment deadlines are getting closer, and the value of real estate has rather decreased: an explosive cocktail for certain borrowers. And by extension, for the most exposed banks.
The scenario of a real estate crisis degenerating into a banking crisis – implacable on paper – has however not materialized until now. How to explain it? And will there be disillusionment tomorrow? In other words, are we in the middle of the Chernobyl cloud?
Well localized problems
Not necessarily. A first factor for optimism lies in the very nature of real estate risk. There is not one, but several real estate markets. “A lot of factors come into play, whether it’s the location or the market segment addressed. The portfolios are rather granular and overall present a moderate risk,” underlines Rafael Quina, in charge of monitoring French banks at Fitch.
As regards more precisely the exposure to American commercial real estate, the one which worries the most since the rise in rates, the exposure of French banks is “very contained”, adds the specialist. The banking sector also puts forward another argument: that of its balance sheet size. Bank portfolios are so large that the CRE would ultimately account for a fairly limited share of its exposures.
Symmetrically, the deterioration in the quality of CRE loans is more limited in Europe than in the United States, even if certain localized situations may have caused concern. Like the bankruptcy, at the end of 2023, of the Austrian real estate giant Signa, the effects of which were felt in Germany, but also in Switzerland, where the prestigious private bank Julius Baer found itself too exposed to this cumbersome borrower, suffering a loss of more than 606 million Swiss francs.
“We can clearly see the situation now”
As for the supervisors, “we see the situation clearly now,” explains a source. There are pockets of risk, and the banks concerned have had to set aside provisions to deal with possible problems.
As for the exposure of banks through their powerful asset management or insurance subsidiaries, this is not worrying on paper: the latter were able to gain exposure to borrowers in the CRE sector, on behalf of their clients. In the event of a problem, it is not the insurer or asset manager who bears the risk. But the customer-saver, either through a capital loss, or in the form of a drop in the return on his investment.
Are the big banks totally ‘bullet proof’ when it comes to commercial real estate? Probably not, due to some blind spots in the risk assessment.
Can we conclude that the big banks are completely “bullet proof” when it comes to commercial real estate? Probably not, due to some blind spots in the risk assessment. From a strict sectoral point of view, first of all, it is difficult to isolate commercial real estate. When it is doing poorly, many other sectors linked to it – in crafts, in construction, in commerce or services – can find themselves in difficulty as a result.
Loosening the grip… just in time
A second blind spot is the place taken by non-bank players (Blackrock, etc.) in the real estate sector. On paper, the presence of these financial giants could be good news, demonstrating optimal risk distribution.
On the one hand, the ultra-regulated banks would be more conservative, and therefore less exposed. On the other, global asset management giants investing where banks can no longer go. A reassuring picture, but incomplete since there may be links (financing, distribution, etc.) between the banking and non-banking spheres, which are not as tight as that. The radioactive cloud is therefore not necessarily ruled out.
It is the central banks which could, ultimately, decide between the optimists and the pessimists: with inflation slowing, the start of a rate cut is expected in the euro zone. Enough to start loosening the grip on borrowers, just in time.