The troubles in the United States commercial property market, which have already hit banks in New York and Japan, moved to Europe this week, elevating fears about broader contagion.
The latest victim was Germany’s Deutsche Pfandbriefbank AG, which saw its bonds slump on concern about its exposure to the sector. It responded by issuing an unscheduled statement Wednesday that it had increased provisions because of the “persistent weakness of the real estate markets.”
Canada’s bank regulator also called commercial real estate loan losses a manageable risk for this country’s biggest banks Tuesday.
For offices in the U.S., where the return to work following the pandemic has been slower and less substantial, the value destruction has been particularly bad. And some predict the full impact might not even be fully priced in yet. Analysts at Green Street said that a further writedown of as much as 15 per cent may be needed this year.
“Appraisal values remain much too high,” they wrote in a note. “Lenders that base their decisions on these appraisals have greater odds of taking impairments” and some could face “strain” as a result.
The plunge in German lenders’ bonds was the latest in a series of warning signals. New York Community Bancorp was cut to junk by Moody’s Investors Service after flagging real estate problems, while Japan’s Aozora Bank recorded its first loss in 15 years due to provisions on loans extended to U.S. commercial properties.
“There are serious concerns in the U.S. CRE market,” said Rabobank credit strategist Paul van der Westhuizen. “It’s a not an issue for larger U.S. and European banks but the smaller property-focused German banks are feeling a bit of pain. Right now it’s more a profitability issue than a solvency issue for them though. They have sufficient capital and are less exposed to the threat of deposit runs than pure retail banks are.”
In its results last week, Deutsche Bank AG recorded provisions for losses in U.S. commercial real estate that were more than four times bigger than a year earlier. It warned that refinancing poses the greatest risk to the struggling sector as asset values suffer.
Elsewhere in Europe, Switzerland’s Julius Baer Group Ltd. said it would write down huge loans to bankrupt property company Signa. While it was a specific issue, it’s added to the broader worries about real estate and how far the issues could spread.
On Tuesday, Morgan Stanley held a call with clients recommending they sell Deutsche PBB’s senior bonds. The notes due in 2027 have tanked over 5 cents since and are now quoted at around 97, according to CBBT data compiled by Bloomberg. Meanwhile, the bank’s AT1 notes slumped 14 cents to 37 between Tuesday and Wednesday.
Deutsche PBB said Wednesday that it has increased loan-loss provisions to €210-215 million for the full year. It said it “remains profitable thanks to its financial strength.”
Concerns over PBB has spread to other banks with exposure to commercial real estate. Aareal Bank AG bonds have lost about 11 points in the last two days and are now quoted at 75 cents on the euro. In November, it reported that the value of US non-performing loans had risen more than fourfold over the previous year.
Germany’s central bank warned last year about the risks surrounding commercial real estate, saying there could be “significant adjustments” that lead to higher defaults and credit losses.
“The outstanding volume of loans granted by the German banking system to the US commercial real estate market is comparatively small, but relatively concentrated at individual banks,” the Bundesbank said.
Germany’s Landesbanks have also felt the pain of their exposure to commercial real estate; in the first half of 2023, the major state banks – Helaba, BayernLB, LBBW and NordLB – posted provisions of about €400 million in total.
If the CRE losses spread to Europe through smaller German banks, that would have an echo of the 2008 global financial crisis. Back then, it was the Landesbanks that got into trouble, when their exposure to subprime mortgages in the U.S. led to billions of euros of writedowns.
“You have to be mindful as you don’t know exactly where the bottom is,” said Raphael Thuin, head of capital markets strategies at Tikehau Capital. “We are aware that there could be more pain to come in commercial real estate.”
— With assistance from Steven Arons, Stephan Kahl, Jeff Black and Helene Durand.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
The Canadian Press. All rights reserved.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
The Canadian Press. All rights reserved.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
The Canadian Press. All rights reserved.
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