The European Central Bank (ECB) is closely examining property valuation methodologies as concerns mount over the inadequate adjustment of commercial real estate loan values by European banks. This initiative forms part of the ECB's broader strategy to identify potential risks in lending institutions, with further impairments expected if valuations, previously recognized as a "blind spot," are deemed outdated.
The commercial real estate sector, which has attracted significant investment from European banks over the past decade, has been hard hit by the shift towards work-from-home trends, online shopping, and rapidly increasing interest rates due to the pandemic. These factors have contributed to falling prices in markets such as the US and UK, and now Eurozone countries like Germany.
Major valuation providers including CBRE Group Inc (NYSE:CBRE)., Jones Lang LaSalle Inc., and Cushman & Wakefield (NYSE:CWK) Plc are struggling to establish accurate values due to the scarcity of recent comparable deals. The International Monetary Fund (IMF) has flagged this sector as a major credit risk.
German lenders Deutsche Bank AG (NYSE:DB) and Germany's Landesbanks have started acknowledging the necessity for mark-downs in collateral. Landesbanks has built about €400 million ($423 million) of reserves in the first half of 2023. According to data from BNP Paribas (OTC:BNPQY) Real Estate, London office valuations have declined more than 17% year-to-date through June, a drop that is more than double that seen in Frankfurt.
In the second quarter of 2023, Deutsche Bank AG reported a doubling of loan-loss provisions due to the continued weakness in commercial real estate. This move by Deutsche Bank underscores the ongoing challenges faced by the broader banking sector as it grapples with the impact of changing market dynamics on property valuations.
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