Commercial real estate sector faces risks as financial conditions tighten » FINCHANNEL

Momentum, however, appears to be waning as global financial conditions have tightened this year as central banks moved to raise interest rates. Like our Chart of the week shows, real estate prices in the industrial and residential segments have, on average, experienced a deceleration in all regions over the past few months. At the same time, the depreciation of retail and office property prices increased.

Tighter financial conditions tend to have a direct impact on commercial property prices by making it more expensive for investors to finance new transactions or refinance existing loans, thereby reducing investment in the sector. They could also have an indirect impact on the sector by slowing down economic activity, reducing the demand for commercial goods such as shops, restaurants and industrial buildings.

In a recent analysiswe find that financial conditions are indeed an important driver of commercial real estate prices, and they help to explain the divergent performance of the sector across regions during the pandemic.

In general, economies with easier financial conditions (i.e. lower real interest rates and other market conditions that make it easier to obtain financing) experienced a smaller decline in commercial real estate prices during the pandemic and a faster recovery. Commercial real estate prices have also been higher in countries that have implemented relatively less stringent public containment measures to control the spread of the virus, rolled out larger fiscal support programs and have higher vaccination rates. raised.

A sharp tightening of financial conditions could thus put the commercial real estate sector back under pressure, particularly in regions where the outlook for economic growth is weak and if strict containment measures must be put in place to curb new waves of downturns. infections.

Our analysis also suggests that trends catalyzed by the pandemic, such as working from home and e-commerce, are having an impact on commercial real estate prices.

The increase in telecommuting, for example, tends to reduce the demand for office space, while e-commerce negatively affects the price of commercial real estate as consumers shop online. As considerable uncertainty surrounds the future pace and magnitude of these structural changes, tighter financial conditions could compound these effects and exacerbate downward pricing pressures in affected segments.

Disruptions in the commercial real estate market could in turn potentially threaten financial stability due to the sector’s connectivity with the financier system and macroeconomics at large. Continued vigilance is warranted by financial supervisors to mitigate these risks.

To ensure the resilience of the banking sector, stress testing against significant declines in commercial real estate prices should be conducted to inform decisions regarding the adequacy of capital buffers for commercial real estate exposures. Banks’ commercial property valuation assumptions should also be reviewed to ensure that provisions are adequate. In regions where non-bank financial institutions are significant players in commercial real estate finance markets, efforts should focus on broadening the scope of macroprudential policy to cover these institutions to mitigate risks. systemic.

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