ECB: Lending conditions to become tighter for real estate borrowers

Refinancing risk will drive a further tightening of credit conditions, according to the central bank.

The net tightening in credit standards and terms and conditions offered to commercial real estate borrowers by European banks will remain “very elevated” in the first half of 2024, according to the European Central Bank. The industry continues to experience the biggest tightening of lending conditions across the economy, the central bank said.

The ECB’s quarterly Bank Lending Survey, published on 23 January, showed it expects lending conditions to tighten for most sectors in the first half of 2024 and ease off in the second half of the year. However, it predicted the net tightening would remain most acute for commercial real estate owing to continued refinancing risk.

“Higher risk perceptions, lower risk tolerance and higher pressure related to supervisory or regulatory requirements remain the main factors behind banks reporting a tightening impact of credit quality on their lending conditions in the second half of 2023,” the central bank said.

“This reflects increased refinancing and repayment risks and a more prudent attitude towards credit risks in the context of higher lending rates and weak economic growth.

“Banks assessed credit quality risks for firms on average as contained. But there were pockets of deteriorating quality in certain segments, such as commercial real estate or construction.”

Against a backdrop of decreasing demand across all economic sectors, demand was decreasing most in the commercial real estate sector as rising interest rates dampen appetite, the survey found. The ECB said it expected this to continue in 2024 but the trend would be most pronounced in real estate.

European real estate firms face the largest refinancing challenge globally, on a relative basis over the next three years, according to investment manager AEW. It said on 19 January that, this year, the region faced a $40 billion shortfall between maturing debt and the finance available to replace it.

In response to the ECB’s survey, ING bank wrote in a blog, published on 23 January, the survey reflected the strictest credit standards and weakest loan demand seen in a long time. It added the outlook for lending and investment remained “quite bleak”.

However, the Dutch bank added: “For the ECB, the survey provides confirmation that monetary transmission remains forceful, and that economic activity will remain curbed by tight policy in the coming quarters. That further paves the way for first rate cuts over the course of the year.”