There's no reason for banks to back away from commercial real estate.

The softening in the commercial real estate market is still a challenge. Nordic banks remain the most vulnerable in the commercial real estate sector, but when it comes to climate transition risks, these assets do not seem to be the most vulnerable in Europe.

Since central banks began aggressively raising rates to combat rising levels of inflation, commercial real estate (CR) has become a key area of concern. Rising interest rates and a reduced need for office space (due to the effects of working from home) have led to higher levels of vacancy and lower property values. While the worst of the price downturn is easing, concerns remain over more''tight financing conditions and the fact that IPs' high debt maturities will continue to put pressure on a sector heavily dependent on debt financing. The increasing presence of investment funds in commercial real estate adds further concern, especially if these companies must sell their properties to cover upcoming debt repayments. Real estate investments are declining and climate transition risks are piling up, but it is reassuring that rental income growth remains steady. Banks are also much better capitalized now than they were during the financial crisis. However, supervisors remain vigilant about the strain that could emerge from the sector''commercial real estate, especially if interest rate levels remain high for an extended period in a still very uncertain geopolitical, inflationary and economic environment.

Nordic banks remain the most vulnerable to commercial real estate

While many banks have reduced their exposure to commercial real estate over the past decade and have become more stringent on lending terms, loans to the commercial real estate sector still account for around 30% of corporate loan portfolios for European banks. However, exposure levels vary significantly from country to country. In Nordic countries such as Sweden and Denmark, loans to companies in commercial'In Spain and Italy, only 10% and 13% of banks' corporate loan portfolios are loans to commercial real estate companies. In Spain and Italy, only 10% and 13% of banks' corporate loan portfolios represent loans to commercial real estate companies.

The development of real estate prices is important for securing loans backed by commercial real estate.

Real estate pledged as collateral for loans to commercial real estate companies is an important protection against rising delinquencies. This is true not only for loans to QN companies, but also for other parts of corporate loan portfolios secured by commercial real estate. Loans secured by commercial real estate have relatively high positions in the''corporate loan portfolios of Benelux banks, despite the fact that these banks have lower direct exposure to QE firms. Banking sectors with higher exposure to commercial real estate firms are indeed also among banks with relatively higher shares of commercial real estate secured loans, suggesting that loans to commercial real estate firms are often secured.

The valuation requirements under CRR

Section 208 of the EU Capital Requirements Regulation (CRR) requires frequent monitoring of commercial real estate values at least once a year. If there is evidence of a significant decline in the value of the property compared to general market prices, the value''real estate must be reviewed by a qualified appraiser. Loans tied to commercial real estate also require periodic appraisal updates by a qualified appraiser. These requirements allow banks to more actively monitor and manage risks associated with commercial real estate.