Real estate ”cracks” threaten European banks
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European banks have lent over 1.4 trillion euros to the commercial real estate sector, reports the EBA (European Banking Authority), posing significant vulnerabilities against the volatile real estate market.?
The European Union’s banking watchdog reported that this exposure level marks a 40% increase in the past decade, with smaller banks having exposures that are now multiples of their equity, making them especially vulnerable.
Banks in France and Germany represent the highest levels of exposure - more than 280 billion euros - followed by Dutch banks which reported 170 billion euros.
EU banks have already allocated 31 billion euros as a safeguard against potential defaults on real estate loans, with the EBA stating that the risks should be "manageable." The EBA also highlighted Denmark's capital buffer for property risk as an effective measure for mitigating these risks.
The EBA further observed a swift increase in debt issued by banks to non-bank financial institutions (NBFIs), which now makes up over a quarter of the total debt issued by banks.
"The downturn of the real estate market might also have stronger repercussions on market stability, negatively affecting NBFIs significantly exposed to the segment," reads the report.
Join the most prominent figures in European real estate on September 10-11th in Paris, for two days of closed-door roundtable discussions, shaping the future of the real estate market.
How does geopolitics really affect the markets?
“Ongoing volatility in the global political environment will continue to be felt across the real estate industry,” says Ex-European Commission President, José Manuel Dur?o Barroso.
Describing the current geopolitical situation as polarised, fragmented, volatile, unpredictable and dangerous, Dur?o Barroso lamented that following Russia’s invasion of Ukraine, “the world will never be the same”, as concerns of national security and resilience are now prioritised over traditional considerations of market efficiency and competitiveness.
Leading real estate players are increasingly flagging political instability as crucial factors in strategic plans, as has been unambiguously evident throughout GRI Club discussions in the past 6-12 months.
Voting among the most esteemed leaders in European real estate at the GRI Chairmen’s Retreat 2024 in January of this year, revealed that geopolitical risks were the major concern for a significant 61% of voters, with the risk of war threatening to push inflation up further, and the uncertainty around the forthcoming US presidential election creating a volatile market environment.
But how do geopolitical shocks actually affect markets? JP Morgan’s recent research delved into the impacts of historical events of the past century, finding that, in fact, many of these events have a fleeting impact on large cap equity markets with no lasting effects beyond three months.
Simply the threat of geopolitical risks, however, is already impacting Europe. After swiftly adjusting to the loss of Russian gas supplies, the continent is now showing a growing trend of protectionist and nation-focused policies that prioritise resilience and self-reliance over global openness. As a bloc that fundamentally supports open societies and free trade, this is problematic.
The EBA’s latest risk assessment also referred to the “elevated uncertainty" stemming from geopolitical factors, including the potential risks posed from the French parliamentary election.
GRI Club Chairmen’s Retreat members will be convening once again to take stock of the real estate market and wider global scenario at the GRI Chairmen’s Reunion 2024.
This exclusive, backstage discussion, tailored for a select group of elite, top-tier members will gather the top minds before the spotlight hits the main stage at Europe GRI 2024.
Europe faces a slow and “anaemic” recovery
“Europe, including Germany, is waking up from an environment of a stagnating economy,” said Carsten Bzerski, Chief Eurozone Economist at ING Group, during an exclusive interview at Deutsche GRI 2024.
We are seeing policy initiatives to attract and stimulate foreign investments, such as the European Green Deal and the European recovery fund, and for the first time in three decades, the ECB has cut rates before the American Fed.
At the recent Deutsche GRI 2024, Carsten also addressed the event as keynote speaker, giving in-depth analysis of the current European economic scenario. There are three primary structural factors that are significantly impacting the European economy: demographics, de-globalisation, and decarbonisation.
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Demographics, and more specifically the labour shortage in Europe, particularly in Germany, will continue to be a major issue. Wage pressure is expected to rise, contributing to inflation or at least upward pressure on prices.?
The change in trade patterns, often labelled as de-globalisation, is the end of globalisation as we know it. Re-regionalisation and near-shoring means that companies will need to restructure their supply chains, requiring significant investment, and leading to higher costs for consumers.
Decarbonisation and the green transition demands continuous investment in commodities, pushing up price levels. Higher taxes on certain goods, such as flights or meat consumption, are examples of measures that can drive these changes.
The broader optimism surrounding a global economic recovery does not fully extend to Europe, Carsten explained. Instead, Europe faces an “anaemic recovery” marked by slow and uneven progress.
Other interviews from the recent Deutsche GRI 2024 are also available on the GRI Club YouTube channel, including GFORM’s James McEvoy, Commerz Real Ag’s Maja Procz, and BEOS AG’s Christina Sch?dler.
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