"The Central Bank warns: the decline in the real estate market may continue for several years and pose a threat to banks."."

The statement from the European Central Bank highlighted increased concerns about the collapse of commercial real estate in eurozone countries such as Germany and Sweden.

In recent years, commercial real estate has suffered from economic weakness and high interest rates, which has posed challenges for the sector's profitability and business model. This could have a negative impact on financial institutions, from investment funds to insurance companies, known as "shadow banks." Although this sector is not large enough to create systemic risk for creditors, it could amplify potential shocks to the financial system, the ECB notes.

While non-financial firms, especially investment funds and insurance companies, are facing significant losses. "It is expected that a prolonged period of reduced profitability and increased financing costs may render business models based on pre-pandemic profitability and low interest rates unsustainable in the long term," the ECB report states.

The report was published when deep cracks appeared in the real estate market of the leading eurozone economy, Germany. Unexpected changes in interest rates forced some developers to go bankrupt and halt transactions and construction. The construction of one of the tallest buildings in Germany, right here in Hamburg, suddenly stopped after the developer ceased to pay the workers.

Banks in Austria had an exposure of 2.2 billion euros ($2.4 billion) to Signa Group.

The ECB report states that mortgage loans for residential real estate account for about 30% of bank loans, while commercial real estate makes up about 10%. In the first half of 2023, commercial transactions in the real estate market decreased by 47% compared to the same period in 2022. This makes it difficult to determine how much prices have fallen, but the largest listed tenants in the eurozone are trading at a discount of more than 30% from asset values, the largest discount since 2008, notes the ECB.

The report states that if stricter financial conditions are maintained over the next two years, as expected in the market, the share of loans granted to unprofitable companies could rise to 26%. If these conditions persist and firms need to extend all loans, this percentage could increase to 30%. "This loan book is characterized by significant vulnerabilities, especially considering that a prolonged period of low profitability and increased financing costs is expected," notes the ECB.