(Bloomberg) — German banks are cutting legacy US office loan exposure after concerns about commercial real estate losses led to a plunge in bond and equity prices in February.
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Deutsche Bank AG is close to selling about $1 billion of loans linked to CRE there and Deutsche Pfandbriefbank AG is cutting back on office and American loans after it set aside hundreds of millions of euros as a buffer against potential property losses. The lender recently agreed a potential advisory role for a Starwood Property Trust Inc. subsidary on some of its US CRE book.
Landesbank Hessen-Thueringen Girozentrale, meanwhile, weighed options including a sale of its stake in a portfolio of loans linked to US offices, according to people with knowledge of the matter. Aareal Bank AG, another major lender to US CRE, earlier this year reduced soured office loans there by about €500 million ($543 million) to contain the fallout from deteriorating property markets. The banks declined to comment.
The sales come as market participants expect the European Central Bank to press German banks to recognize higher losses on American assets. Values on average have fallen by more than 75% from the peak for all but the best US offices, according to Stijn Van Nieuwerburgh, a professor at Columbia University Graduate School of Business.
“Price-growth declines have resulted in unrealized losses across most vintage periods for office, even for loans originated well before the pandemic,” Fritz Louw and Jim Costello of MSCI Real Assets wrote in an October report on CRE lenders in the Americas. Exacerbating the problem, about one quarter of the country’s office space is forecast to be vacant by 2026.
Still, declining interest rates have boosted optimism that the worst of the decline is over. Deutsche Bank says the pricing of the loan portfolio it’s selling, which it didn’t disclose, is evidence that the CRE market is stabilizing.
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The market turmoil earlier this year was sparked when the lender then known as New York Community Bancorp slashed dividends to build a bigger loss buffer. Credit provisions at NYCB, now renamed Flagstar Financial Inc., rose 237% to $947 million in the first nine months of the year compared with the same period in 2023, the lender said last month.
Banks in the US responded to the downturn by kicking the can down the road. In an October research paper, New York Federal Reserve staff warned that “banks have extended the maturity of their distressed CRE mortgages coming due and pretended that such credit provision was not as risky to avoid further depleting their capital.” The wall of debt represents a financial stability risk, they wrote.
Higher Exposure
While German lenders weren’t the focus of that study, they have higher CRE exposures than most of their European peers. It can take longer for issues with lending to emerge in the region because they typically only value domestic assets annually, compared with as often as quarterly in the US.
That’s led to more volatility in America and is one of the reasons why the banks are offloading those assets, according to two people with knowledge of the matter, who asked not to be identified as they were not authorized to speak to journalists.
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