FRANKFURT/BERLIN (dpa-AFX) - Commercial properties are coming under increasing pressure in the real estate crisis - first and foremost offices, which are suffering from the trend towards working from home and increasingly burdening the balance sheets of banks. The turbulence is driving politicians and supervisory authorities.

According to the Association of German Pfandbrief Banks (VDP), prices for commercial real estate fell by a good 12% in the fourth quarter of 2023 compared to the same period of the previous year or 4.9% compared to the previous quarter - driven by the decline in office properties. The association, which represents the most important real estate financiers in Germany, spoke on Monday of the largest price decline ever measured for commercial real estate. By comparison, residential real estate prices only fell by 6.1 percent within a year or 1.6 percent compared to the previous quarter.

"Due to the uncertainty surrounding economic development in Germany and the still unclear effects of the home office trend on the amount of office space required, demand for offices remains subdued, which is putting further pressure on prices," said VDP Managing Director Jens Tolckmitt.

Market for office properties collapsed

According to the VDP, prices for retail properties have also fallen sharply recently, although not quite as much as for offices. Data from real estate specialist Jones Lang LaSalle (JLL) shows the extent of the crisis. According to this data, the transaction volume for office properties in Germany will have slumped by 76% to around 5.2 billion euros in 2023.

Because the trend towards working from home means less office space is needed, the market for these properties is under pressure in many countries. The USA is particularly affected, where the consequences of the office crisis are weighing on several smaller banks. New York Community Bancorp, for example, recently got into difficulties, also posting losses due to bad real estate loans. It was only around a year ago that the US real estate market triggered a banking crisis when several regional banks collapsed due to rapidly rising interest rates. Investors and regulators are correspondingly wary of the new difficulties.

The commercial real estate market is going through an "adjustment period", said German Finance Minister Christian Lindner (FDP) in an interview with Bloomberg TV on Monday. "Interest rates are much higher than expected and so many companies are worried and have to adjust their expectations. I think we have to be aware of the situation." From what he knows, however, the overall market is stable, Lindner said.

According to insiders, the European Central Bank (ECB) is threatening banks with problematic commercial real estate loans with higher capital requirements. This applies in the event that institutions do not have sufficient control over the risks in this business, the Bloomberg news agency recently reported, citing circles.

Among the banks in the EU, institutions from Germany and France are particularly heavily involved in commercial real estate, according to data from the European Banking Authority (EBA). In addition, a number of banks, including Landesbank Helaba, have been affected by the collapse of the real estate empire of Austrian entrepreneur René Benko, whose Signa Group includes the Galeria department store chain.

German Pfandbriefbank at the center of the turbulence

The problems with commercial real estate are now also affecting German banks. Deutsche Pfandbriefbank, which has granted many loans for office buildings and shopping centers in the USA, is at the center of the problems. The financial institution from Garching near Munich had to increase its risk provisions against crises in the fourth quarter and recently tried to reassure investors with a statement on its liquidity position. The bank, whose shares plummeted last week, speaks of the "biggest real estate crisis since the financial crisis".

Deutsche Bank is also comparatively heavily involved in the American commercial real estate market. It has granted loans for around 17 billion euros for US commercial real estate, 7 billion of which for offices. The bank will be able to cope with defaults on loans for US commercial real estate, CFO James von Moltke said recently. However, they are likely to be higher in the first and probably second quarter than Deutsche Bank would like. At the same time, the bank pointed out that the US office portfolio only accounts for 1.5 percent of the total loan book.

According to the Association of Pfandbrief Banks, an end to the real estate crisis is not in sight. "A turnaround in real estate prices, which has already been the subject of much public speculation, is not yet in sight," said CEO Tolckmitt. "2024 will also remain difficult for the time being." Prices for residential properties are expected to stabilize in the summer, while prices for commercial properties are not expected to stabilize before the end of the year./als/DP/ngu