LONDON, June 27 (Reuters) – The real estate sector poses only a moderate systemic risk to most European banks, as they have only modest exposure to it in their loan books, although Sweden and Germany are outliers, S&P Global Ratings said in a report on Tuesday.
In its 3Q23 credit conditions report, the ratings agency said the outlook for parts of the property market was poor, given that financing conditions in Europe are expected to keep tightening as central banks raise rates to tackle inflation.
“The outlook for key segments within European real estate is poor, although only a moderate systemic risk, in our view, given the role and strength of the larger European banks,” S&P said.
While European economies, households, and businesses have proved fairly resilient in the face of the fastest tightening cycle since the global financial crisis, credit risks lie ahead as the lagged impact of stubbornly high inflation and higher interest rates take a toll, it added.
In real estate, offices, particularly in non-prime locations, and logistics are more vulnerable, while in the residential sector, S&P anticipates more pressure in countries with a high share of variable-rate mortgages and where the interest rate rise is largest, such as Sweden.
However, residential mortgage portfolios are unlikely to be a major source of credit losses for European banks given the relative strength of household finances and labour markets, as well as strict regulatory standards for mortgage lending.
Going forward, S&P sees as top risks a fragile economic growth; a possible escalation and broadening of the Ukraine-Russia conflict; and higher interest rates, compounded by limited access to financing, particularly for lower-rated firms, at a time when banks tighten their lending standards and central banks withdraw liquidity from fixed-income markets.
In its base case, the firm expects eurozone economic activity may contract towards the end of the year as the effect of the post-pandemic recovery fades and higher rates bite, which will likely dampen demand.
Reporting by Chiara Elisei; Editing by Amanda Cooper
Our Standards: The Thomson Reuters Trust Principles.
