Dutch financial institutions must prepare for higher credit risks and further price corrections in the commercial real estate market. This emerged on Monday from a report from supervisor DNB on financial stability.
According to the central bank, Dutch banks, insurers and pension funds are jointly exposed to this market for 360 billion euros. Due to the negative developments in this market, the chance of default increases, which can increase losses and cause real estate valuations to fall further.
Dutch banks have not yet shown any signs that credit risks of commercial real estate are materializing, but this may change and banks must be aware of an increase in credit risks, DNB warned.
Insurers and pension funds are also exposed to losses due to price corrections of commercial real estate, which have a direct impact on the balance sheet.
Since mid-2022, the transaction value of commercial real estate has fallen by 13 percent. This pressure is visible in all segments, including the office market.
The higher financing costs as a result of increased interest rates and construction costs lead to a lower expected return on commercial real estate, fewer investments and a lower credit requirement. In addition, the popularity of e-commerce and the increase in working from home are putting structural pressure on the commercial real estate market, according to DNB.
Real estate investment funds must be alert to an increase in repayment requests, DNB said. These risks appear to be limited, given the conditions of investment funds regarding repayment.