European banking rules that ignore commercial real estate (CRE) debt will affect businesses’ ability to borrow money, according to Commercial Real Estate Finance Council (CREFC) Europe.
In a response to the European Commission’s (EC) consultation on how current capital requirement regulations affect the flow of credit, CREFC said a functioning CRE debt market is vital to both small and medium (SME) sized businesses and infrastructure development.
CREFC and other property industry bodies have been lobbying the EC to take a more inclusive approach to real estate debt before a raft of new capital requirement and securitization regulations come into force.
“Regulators continue to ignore the very real benefits CRE brings to the wider economy,” said Peter Cosmetatos, chief executive of CREFC Europe.
“Unfortunately, the global financial crisis and real estate risk continue to be linked in their considerations, the hangover from which leads policymakers and financial regulators inappropriately ignoring or penalising CRE finance or particular forms of CRE exposure.”
“Continuing to do this however has implications for infrastructure and SMEs,” added Cosmetatos.
CREFC said businesses that own their own premises can often obtain finance only on the basis of giving their business premises as security to a lender, with CRE collateral effectively supporting SME finance.
“Separating SME loans that are secured on business premises from CRE can be challenging – yet regulation often treats the two very differently, creating arbitrage risk, distorting incentives and reducing transparency in bank lending,” said CREFC.
Infrastructure also has close ties with CRE. Both are capital intensive and have long lead times. Defining what is infrastructure and what is CRE can be problematic. Assets such as healthcare, educational and leisure facilities, can be classed as both CRE and as social infrastructure.
“Therefore, promoting SME and infrastructure finance while ignoring CRE is not a rational position to take,” said CREFC.
The EC consultation on how the Capital Requirements Regulation and the Capital Requirements Directive IV impact the flow of credit from banks to the real economy closed yesterday.