Bank chaos piles more uncertainty on the real estate debt market

Lenders at MIPIM were sanguine about Silicon Valley Bank, but the Credit Suisse situation will amplify concerns.

Just when you thought it was safe to go back in the water, along come bank failures in the US and a bailout of one of Europe’s biggest lenders.

As MIPIM in Cannes got underway on Tuesday, news about the failures of US lenders Silicon Valley Bank and Signature Bank was being absorbed. Few had reached conclusions, and most were keen to focus on what they saw as the main story – how rising rates are impacting property values and trading activity.

It would be a stretch to say the mood was positive. But there was a sense on the opening day that the industry is getting used to dealing with uncertainty, and lenders seemed keen to do deals anyway. The consensus was: H1 will be a painful period of price discovery, giving way to more transactions in H2.

When pressed on the likely impact of SVB’s and Signature Bank’s demises, many said they simply did not know yet, or played it down. Circumstances at each bank were situational, some argued, with each too concentrated in their exposure. Ripple effects in European property lending were difficult to envisage, they said.

Wednesday’s news that a quarter of the share value had been wiped off Swiss giant Credit Suisse, on the other hand, ratchetted up the concern at MIPIM. Again, most argued it was too soon to know the impact, but that story was no doubt too close to home.

The reality is that it is too early to know. The initial measured response from many at MIPIM may turn out to be justified. Yes, each of the American banks had unique problems, and SVB’s treasuries bets now look unwise. Credit Suisse’s current plight might have been caused by its main backer saying it could not offer further financial support, but the roots go back to several years of scandals, management changes and losses.

However, when there is trouble in the banking sector, it is only prudent that worst-case scenarios are considered – even if some find talk of another global financial crisis alarmist. As one lender at MIPIM put it: SVB alone was a “fire alarm test” for the banking sector.

While each situation in the past week had its unique circumstances, all were owed – at least to a degree – to the rising rates environment exposing or exacerbating weaknesses at each institution. In the wider banking sector, many organisations bought up cheap bonds in recent years which are worth less since rates have risen. Analysts, however, have said European banks should be less impacted as they have diverse funding sources and strong reserves.

That said, Thursday’s move by the European Central Bank to raise rates by 0.5 percentage points – despite hopes for a last-minute U-turn due to the bank chaos – raises further questions about banks’ ability to cope with higher borrowing costs.

There is also wider confidence in the banking system to consider. The Swiss central bank’s SFr50 billion (€51 billion) bail-out of Credit Suisse stirs memories of the global financial crisis. Even if wider liquidity fears are unfounded, investors are selling bank stocks, meaning lenders may need to raise deposit rates. Real estate borrowers in Europe are already experiencing the pressures that come with higher debt costs and will not welcome the prospect of additional pressure on bank funding costs.

The European banking system is on a much firmer footing than it was in the run-up to the 2007-08 crisis. Most banks are well-capitalised and have reduced their risk exposures over time, including in the real estate sector. Hopefully, swift action on Credit Suisse will avert a wider crisis.

However, at the very least, this week’s banking sector woes add another layer of uncertainty to the macro-environment in which real estate investors and lenders operate. Debt specialists at MIPIM had hoped for smoother sailing during 2023. The waters may get choppier yet.