Commercial property in Europe and its main lenders
Europe’s commercial property sector is facing serious challenges. This is the conclusion reached by the European Central Bank after analysing the market. According to experts, the current difficulties could have a negative impact on the region’s financial system. However, it is still difficult to assess the extent of the threat.
The European commercial property market is affected by both cyclical and structural factors. The latter include:
– the rising cost of financing property purchases;
– the massive shift to remote working;
– rising construction and refurbishment costs;
– the cost of upgrading facilities to meet sustainability standards.
These factors place a significant financial burden on property owners. Investors, such as property companies, funds, and trusts, are also under pressure.
Who is financing Europe’s commercial property
The difficulties in the commercial property market are having an impact on bank activity. The ECB estimates total outstanding loans in the sector to be €1.3 trillion. The main risks for banks are:
1. Higher loan servicing costs due to rising interest rates.
2. Lower profitability of companies operating in the segment, which increases the likelihood of defaults.
At the same time, it is worth noting that the designated loan portfolio represents only 6% of European banks’ total assets. This suggests that the banking system as a whole is not seriously threatened in the current situation.
Other institutions, including insurance companies, also lend to the commercial property sector. Their total outstanding exposure is estimated at €50 billion, of which €48 billion is to European companies.
Bond markets finance the commercial property sector in addition to banks and insurers. They are also an important source of funds for investors in European assets. According to the ECB, participants in the sector hold bonds worth €490bn. Difficulties in the property market threaten their stability. As a result, many holders of designated financial instruments may resort to selling them, which will affect the bond sector.
Ways to overcome the difficulties
According to analysts, measures must be taken to reduce risks in the commercial property sector. First, the dynamics must be monitored regularly. The growth of outstanding loans must also be controlled. So far, experts do not see any serious threats to the market or its creditors. However, the interconnectedness of the financial system and the commercial property market highlights the importance of the sustainability of both sectors.