Commercial property’s debt burden exceeds pre-2008 level in eurozone, warns ECB

Euro zone property companies are being hit by surging losses and some will struggle to support their debts, which have risen to a higher level than before the 2008 financial crisis, the European Central Bank has warned.

The losses, which the ECB said would have “consequences for the resilience of banks’ loan books”, stem from sharply higher financing costs, falling commercial property values, weaker rental income and rising concerns about the energy efficiency of buildings.

The central bank said signs of stress in the commercial property sector, which accounts for 10 per cent of all euro zone bank loans, “have the potential to significantly amplify an adverse scenario” and would “drive large losses” in the wider financial system.

The average debt of larger European property companies has risen above 10 times their earnings, “close to or above pre-global financial crisis levels”, the ECB said in part of its twice-yearly financial stability review. The full review is out on Wednesday, but the ECB published its concerns on commercial real estate a day early.

Rises in ECB interest rates have hit the sector hard. It now costs 2.6 percentage points more to finance the purchase of commercial real estate assets in Europe than it did before rates started increasing last year, according to euro zone credit registry data.

The central bank’s benchmark deposit rate is now 4 per cent – up from minus 0.5 per cent before the tightening cycle began.

The rise in borrowing costs would pose a refinancing challenge for the most indebted companies, the ECB said, pointing out that ratings agency Moody’s Analytics had cut ratings or outlooks on 40 per cent of European real estate companies in the year to March 2023.

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