by Tommy Wilkes

LONDON (Reuters) – Big European banks have cut commercial real estate lending and are half as exposed as their U.S. counterparts to the real estate sector in general, making U.S. institutions more vulnerable as prices rise offices continue to decline, Morgan Stanley indicated on Tuesday.

The commercial real estate market is facing its sharpest contraction since the 2008-2009 global financial crisis in a context of rising borrowing costs and the spread of teleworking which is increasing the office vacancy rate.

In a research note, Morgan Stanley analysts point out that American regional banks seem the most exposed to this new situation, as do German regional banks which, unlike large European establishments, have increased their exposure to the market. commercial real estate.

“Overall, we believe the real estate issues will not translate into a systemic event, but rather a manageable impact on earnings, limited to a small group of banks,” Morgan Stanley analysts write .

In a “stress scenario”, in which falling property prices force banks to book losses and the credit quality of borrowers deteriorates, European banks are expected to see a 3% drop in their profits on three years, an impact deemed “manageable” by Morgan Stanley analysts.

This would be all the easier given that 70% of European banks with high market capitalization have reduced their exposure since 2022 to around 5% of their loan portfolio. Almost all European banks also have an exposure of less than 1% to the United States, where office vacancy rates are around 21% compared to only 8% in Europe, explain Morgan Stanley analysts.

GERMAN REGIONAL BANKS EXPOSED TO MORE THAN 20%

The exposure of German regional banks to commercial real estate, on the other hand, is estimated at more than 20%, with loans in the sector representing the majority of the credit portfolio of specialized establishments such as Deutsche Pfandbriefbank and Aareal, details Morgan Stanley.

Among the major European banks, Deutsche Bank is the most exposed to the American commercial real estate market. However, its loans to the sector represent only 1.5% of all its credits, according to Morgan Stanley. The German bank has also already provided for possible losses on these loans.

Large-cap U.S. banks have about 11% exposure to commercial real estate, while mid-cap banks – some of which have seen their share prices plunge in recent weeks – have an exposure of about 30%, note Morgan Stanley analysts.

Risks in terms of refinancing and office vacancy rates are subjects of “major concern” for the market at a global level, underline Morgan Stanley analysts, who however note “notable differences” between American and European banks .

About $660 billion of commercial real estate debt is expected to mature in the United States this year, compared to $150 to $200 billion in Europe, they estimate.

The office vacancy rates in cities are respectively 32% and 27% in San Francisco and Los Angeles compared to 9% in London and 5% in Zurich, Morgan Stanley further specifies.

(Report by Tommy Reggiori Wilkes, by Claude Chendjou, edited by Blandine Hénault)

Copyright © 2024 Thomson Reuters