The ECB asked the appraisers real estate to explain how they form their price estimates, as concerns mount that the Eurozone banks have been too late to write off their loans in the commercial real estate market. The ECB’s concern stems in part from a year-long deal drought that has made it difficult to compare property values with actual transactions, they said. Bloomberg sources who wished to remain anonymous.
Banks often rely on the opinions of real estate appraisers for prices. While many banks have already suffered losses on loans they have made in the commercial real estate market, they may be forced to set aside more capital to cover losses if their prices prove too optimistic, according to Bloomberg’s sources. Several European banks have been lending heavily to the commercial real estate market over the past decade to attract income as zero interest rates have crushed their profitability. But this asset class was hit hard by an increase in telecommuting and online shopping during the pandemic, before big interest rate hikes further undermined demand. The result has been prices sinking in the US and Britain, while the decline has also begun to be felt in Eurozone markets, including Germany. “Vulnerabilities in the commercial real estate market are a significant source of credit risk for the financial industry,” the IMF said. The Fund warns that global prices could fall by more than 10% next year.
The contacts with appraisers in recent months are part of the ECB’s broader efforts to prevent potential hits to banks, according to the sources. Regulators are concerned that appraisers and banks have been slow to write down values. Deutsche Bank sees continued weakness in the commercial real estate market in the second quarter. In France, sales of commercial real estate fell in the third quarter to the lowest level in more than 13 years, according to statistics firm Immostat.
