ESRB issues a recommendation on vulnerabilities in the commercial real estate sector
News The European Systemic Risk Board (ESRB), the EU’s macroprudential overseer, has issued a general recommendation on risks linked to vulnerabilities in the commercial real estate (CRE) markets in the EU, Iceland, Liechtenstein and Norway. The recommendation calls for improved monitoring of such risks to the financial system, along with both micro- and macroprudential policy measures to address identified vulnerabilities where necessary.
The ESRB’s analysis indicates the presence of risks in the CRE sector that could impact both the financial system and the real economy should they materialise. The ESRB assesses that the sector is vulnerable to risks related to the prevailing economic climate, such as rising funding costs, heightened inflation and a deteriorated economic outlook following the Russian invasion of Ukraine. In addition, problems in the sector can be amplified through existing linkages to banks and other financial institutions, as well as through spillovers across national borders.
To reduce systemic risks related to the CRE sector, the ESRB is issuing a recommendation to all relevant member institutions to improve the monitoring of risks in the sector and to supervisory authorities to ensure sound financing practices and resilience within the sector. The ESRB also recommends the European Commission to develop what are known as activity-based macroprudential policy instruments as a part of the joint regulation of EU financial markets.
“We welcome the ESRB’s recommendation. It emphasises the importance of continuing the work of addressing the vulnerabilities in the commercial real estate sector. In Sweden, these vulnerabilities are due, above all, to the high level of indebtedness within the sector. In line with the sharply rising interest rates experienced since the summer of 2021, refinancing in the sector has become more difficult and more expensive. High indebtedness combined with rising funding costs entails a clear risk for these companies in the form of both falls in value and lower profitability,” say Governor of the Riksbank Erik Thedéen and Finansinspektionen Acting General Director Susanna Grufman.
The recommendation is addressed to all ESRB member states as well as the European Commission.