The risks faced by banks in lending to the European commercial real estate market are showing signs of easing, according to global credit rating specialist Morningstar DBRS.
The agency said European CRE is still burdened with high leverage as well as increased borrowing costs and falling valuations. However, it also said values are close to bottoming out and that the market has been boosted by falling interest rates and an upturn in transaction levels, making the sector broadly manageable as an investment class.
But Morningstar warned this sense of recovery was “tepid and uneven”, with a full return to health unlikely in the short term.
The agency said European CRE had also been affected by rising construction costs, remote working, online shopping and increased environmental standards, pointing to the collapse of developers and construction companies, such as Signa and Imfarr, as evidence of how tough conditions are.
Morningstar said there was also a deterioration in asset quality in the first half of the year, with the stock of non-performing exposures standing at €59.9bn (£50bn), a 14% increase on the equivalent period last year.
This increase in non-performing exposures was felt particularly by German and Austrian banks, said Morningstar.
Nicola De Caro, senior vice president of Morningstar’s global financial institutions team, said: “We expect European banks to continue reviewing their exposures and collateral valuation in the coming quarters.
“Overall, the risks for banks are broadly manageable, nonetheless, we maintain a cautious stance on banks with high exposure to the sector and concentration risk.”
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