LONDON, March 5 (Reuters) – Major European banks have been cutting their lending to commercial property and have half the exposure of their U.S. peers, making U.S. lenders more vulnerable as office prices plunge further, Morgan Stanley said on Tuesday.
Commercial real estate (CRE) markets are in the grip of the biggest downturn since the 2008-9 financial crisis as higher borrowing costs and a spike in vacancy rates driven by more people working from home hit demand for office space.
Morgan Stanley analysts said in a research note that regional U.S. banks looked most exposed, alongside German regional lenders – which unlike bigger European banks had been increasing their exposure.
“Overall, we think CRE-related issues will not translate into a systemic event, but rather a manageable earnings impact localized to a small set of banks,” the analysts wrote.
In a ‘stress scenario’, in which property price falls force banks to recognise losses and borrowers’ credit quality worsens, European banks would face a 3% hit to earnings over three years, which the analysts called “manageable”.
That is especially the case as 70% of large-cap European banks reduced their exposure since 2022 to around 5% of their loan book, and nearly all lenders have sub-1% exposure to the United States, where office vacancy rates are 21% versus 8% in Europe, the analysts said.
By contrast, German regional banks have more than 20% CRE exposure, with such loans accounting for most of the loan books of specialist lenders Deutsche Pfandbriefbank (PBBG.DE), opens new tab and Aareal, Morgan Stanley said.
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