The crisis on the office real estate market remains a source of danger for banks in the current year, according to a study by the rating agency Creditreform Rating.

Creditreform rating analyst Johannes Kühner explained on Wednesday that there will still be increased risks in 2024, especially for less broadly positioned specialist financiers with large financing portfolios in US office real estate. The study shows that most of the institutions active in the commercial real estate business have so far proven to be resilient. However, the risks for the German banking sector are not negligible. Creditreform Rating is a subsidiary of the credit agency Creditreform.

Among other things, the rating agency examined how vulnerable individual German banks are in the event of a sustained fall in commercial real estate prices in the USA. Its findings: specialist financiers such as Aareal Bank and Deutsche Pfandbriefbank (pbb) are most at risk. "Their office real estate loans amount to 152 percent (Aareal) and 145 percent (pbb) of common equity tier 1 capital," the study states. Helaba stands out among the other banks, with an exposure of 44 percent. High loan portfolios measured against core capital make the institutions particularly vulnerable should the crisis worsen and access to capital buffers become necessary. For most institutions, however, the price decline will be manageable due to their lower exposure to the US office real estate market.

In 2023, Deutsche Pfandbriefbank devalued the properties it financed in major US cities by almost a fifth. It has recognized provisions of 259 million euros for these loans. Loan loss provisions increased almost fivefold - pre-tax profit slumped to 90 (2022: 213) million euros. Aareal Bank, which does around a quarter of its business in the US, more than doubled its allowance for credit losses to € 441 million in 2023. The bank expects 2024 to be another challenging year.

COMPARABLE PRICE COLLAPSE IN EU WOULD HIT BANKS HARD

According to the Creditreform rating experts, the decline in the value of office properties in Europe has so far been more moderate than in the USA. However, they warned that a price decline similar to that in the USA would cause much greater problems for domestic banks. This is because the total office real estate loans on the banks' books amounted to a multiple of the respective US values. For many banks, they would exceed 100 percent of the available hard core capital.

The Association of German Pfandbrief Banks (vdp) now sees light at the end of the tunnel, at least for Germany. It anticipates a slight upturn in the real estate financing business in 2024. In the final quarter of 2023, more real estate loans were granted than in the same quarter of the previous year, it said. This indicates the onset of stabilization.

(Report by Frank Siebelt, Reinhard Becker, edited by Klaus Lauer; if you have any queries, please contact our editorial team at berlin.newsroom@thomsonreuters.com (for politics and the economy) or frankfurt.newsroom@thomsonreuters.com (for companies and markets)).