In the Asian trading session, Japanese lender Aozora warned of similar losses on its US commercial property exposure, driving a 21 per cent fall in its share price. The bank said non-performing loans of $US719 million comprised 38 per cent of its $US1.9 billion of office exposures across the major US cities.
National Australia Bank shares closed down 2.2 per cent to $31.90 on Thursday, while Westpac fell 1.7 per cent to $23.77 and ANZ declined 1 per cent to $26.92.
Roni Green, the chief investment officer of GF Asset Management, said the market had been hit by a “one-two punch” over the last 24 hours.
‘Contagion should be limited’
“Community Bancorp and Aozora have reminded investors about the dangers lurking in commercial real estate in the US,” Mr Green said.
“Investors have been examining commercial real estate exposures to the large banks since the pandemic, so contagion should be limited. Bank bond credit spreads widened overnight, but caution prevails as the valuations are not tempting enough for aggressive buying just yet.”
The US commercial property sector is under intense pressure, with office building owners especially hard hit as the rate of remote working remains stubbornly high and higher interest rates makes real estate assets relatively less attractive to investors.
About $US541 billion in debt backed by office towers, apartments and other commercial real estate assets came due last year, according to Trepp, a data provider. That figure will rise to more than $US2.2 trillion by the end of 2027.
Some Australian investors have substantial exposures to the US commercial property market. AustralianSuper wrote off one investment, a 12-storey office tower in Washington DC, which it owned with Brookfield, in October.
“The narrative surrounding the [commercial real estate] landscape, particularly in the wake of Community Bancorp’s recent disclosures, prompts scepticism and concern,” said Stephen Innes of SPI Asset Management.
“While some may view the commercial real estate apocalypse narrative as an exaggerated tale akin to a ghost story around a campfire, the realities highlighted by Community Bancorp suggest otherwise.”
Moody’s has already placed all long-term and short-term ratings of Community Bancorp and its subsidiary, Flagstar Bank, on review for a downgrade. The ratings agency said that reflected unanticipated loss in its New York office and apartment properties lending portfolio, weak earnings and its growing reliance on wholesale funding.
The real estate related write-downs vindicate analysts that have warned that March’s regional banking crisis, triggered by the collapse of Silicon Valley Bank, had not fully played out, and that the flow of credit into the world’s largest economy could slow.
“If default rates rise and stress on banks’ balance sheets continues to grow – a distinct possibility given that banks are still grappling with legacy portfolio issues related to leveraged buyout debt and commercial real estate loans – then the calls for regulators to increase buffers in the financial system will only grow louder,” Oaktree portfolio managers Armen Panossian and Danielle Poli said in a quarterly update.
“Considering all this, it’s reasonable to assume that banks will have less ability to provide capital moving forward – just as more companies are seeking to refinance massive debt burdens taken on in the easy-money era.”
