Moody’s sees default risks in real estate financing

The rating agency Moody’s warns in a new report of considerable risks in commercial real estate financing. Certain German banks are particularly affected, as they are very active in lending in the sector.

The economic consequences of the corona pandemic are also having an impact on the real estate industry. In the commercial real estate sector, the sub-sectors of hotels, non-food retail and office space in particular are suffering from the measures taken to contain the spread of the virus. Working from home has become increasingly important in recent months, so that, according to Moody’s estimates, future demand for office space could also be weakened. In addition, the travel restrictions and distance requirements have severely damaged the tourism industry. This fact inevitably affects the area’s commercial properties as well. The situation is similar with non-food retail. A possible increase in bankruptcies and shop closures in these segments would jeopardize loan repayments and significantly increase the risk of default.

Real estate financiers faced with higher risks

According to Moody’s analyzes, the relevant real estate financiers are therefore exposed to greater risks. “A decline in commercial property prices in the most vulnerable subsectors will affect the level of collateral and loan-to-value ratios in banks’ portfolios,” said Moody’s analyst Christina Holthaus. “Depending on the duration of the crisis, we expect that payment suspensions, defaults and falling collateral levels will lead to a deterioration in asset quality, an increase in non-performing loans, higher risk provisioning requirements and lower income.”

German banks in particular are among the credit institutions affected. According to Moody’s, these are among the commercial real estate financiers in Europe with the most extensive risk exposures: In 2019, the total volume of lending in the sector at the European Union level was around 1.6 trillion euros – 27 percent of this came from German banks. The institutes specializing in this area are therefore significantly affected by the increased risks of the commercial real estate sector. Moody’s names Aareal Bank AG, Berlin Hyp AG, Deutsche Hypothekenbank (Aktien-Gesellschaft) and Deutsche Pfandbriefbank AG as prominent credit institutions in the area. State support measures and the strong solvency profiles of the financial institutions would, however, mitigate the identified risks to a certain extent.

Aareal Bank and Berlin Hyp have increased risk provisioning

In response to the uncertainties and threats of the Corona crisis, Aareal Bank drastically increased its loan loss provisions in the first two quarters of 2020. In an interview with “Der Aktionär”, CFO Marc Heß explains that the significant increase was primarily due to “the high level of uncertainty due to the worsened macroeconomic forecasts”. However, the bank started the crisis with a good starting position. Last year, the company relied on reducing risk positions and thus strengthened its own profile. With a very conservative loan book, one is also well armed for possible changes in value over the full year. In addition, Hess continues to be convinced of the office and hotel property business. “High-quality office space and hotels will continue to be in demand in the future, especially in the good locations of the metropolises, where we prefer to finance.”

Berlin Hyp is similarly confident in a foreword by the Management Board. For them it is clear that people want “real” experiences and encounters in the future too. This applies both to work and to shopping, in leisure time and on vacation. “Real estate gives space to this desire in the true sense of the word. They remain needed and also in demand as a stable and reliable investment. The basis of commercial real estate financing is therefore still intact, ”writes press spokeswoman Nicole Hanke in the publication. According to its own information, Berlin Hyp has not yet had any significant, negative effects from the pandemic. Nevertheless, the special item for general banking risks was increased by 20 million euros to a total of 438 million euros.

Deutsche Hypo and Deutsche Pfandbriefbank consider themselves well positioned

Deutsche Hypothekenbank recently announced in a publication that it had achieved “satisfactory results from normal business activities” of EUR 24 million in the first half of 2020. Andreas Rehfus, member of the board of directors of Deutsche Hypo, also explains that on the credit side, “there have not yet been any significant negative developments on the financing in the bank’s portfolio”. Although the credit risks should not have increased due to the Corona crisis, the Deutsche Hypothekenbank also decided to expand its provision by 19.6 million euros. Because the pandemic did not go unnoticed by the bank’s business. New lending has fallen significantly in the current period from 1,495.7 million euros in the previous year to 765.5 million euros. “For 2020 as a whole, we can expect a significant deterioration in the economic and industry environment,” explains Andreas Rehfus. Nevertheless, the German real estate market is considered “one of the most stable and safest investment havens” worldwide. The investment dynamic should therefore pick up again in the second half of the year. As a result, we assume a clearly positive result from normal business activity for 2020. All in all, according to Rehfus, the institute feels well prepared for the coming period.

According to an article in the Immobilien Zeitung, the Deutsche Pfandbriefbank reduced its new commitments for shopping centers and real estate in the non-food segment even before the Corona crisis. In the second quarter of 2020, there should not have been any new commitments in either area or in the hotel sector. However, the focus of business is on office space. These make up around 47 percent of the financing. A spokeswoman for the bank said to the Immobilien Zeitung that one felt “well prepared”.

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