At the top of the list of supervisory priorities for the Bundesbank and BaFin over the next three years is the commercial real estate market. This was emphasised by Karlheinz Walch, Head of the Central Department for Banking and Financial Supervision at the Bundesbank, in his keynote speech at the 20th Börsen-Zeitung Real Estate Day. Despite a slight calming of the situation, he warns that risks from the downturn in the real estate markets still remain, and have not yet been fully reflected in bank balance sheets.

With rising prices for residential properties, risks in this sector are likely to decrease. However, not least due to the uncertain economic outlook, the Bundesbank still considers the countercyclical capital buffer and the sectoral systemic risk buffer to be appropriate. In the case of commercial real estate loans, Walch acknowledges that banks have made significantly higher provisions for risk. „Nevertheless, the provisions still seem to be more reactive to declining credit quality rather than following a forward-looking approach“, he states.

He suggests that banks should use the high interest surpluses to make timely and adequate provisions for risks. Regarding real estate loans, it is essential to review risk models, which are often based on data from the past, good years. „Each institution must ask itself how well its model and data are suited to properly estimate current risks.“

The Bundesbank also anticipates that risks will be identified and addressed early, particularly in the case of loans up for refinancing with „sudden interest rate hikes.“ Walch remains critical of the fact that price developments have not yet been fully reflected in the valuations of property collateral. He also cautions against relaxed lending standards in residential real estate financing, although no such indications have been seen so far.

Walch also refutes any criticism of a European Central Bank (ECB) newsletter regarding inspections of commercial real estate exposures. Low transaction volumes should not lead to a disregard for value adjustments or risk provisions. The expectation of a market recovery cannot be the basis for potential provisions. Walch emphasises that the ECB's recommendations do not constitute a tightening of current German law. Overall, „German banking supervision largely shares the ECB’s assessments and, in this regard, aligns with the recommendations of the Good Practices," he says.

In a panel discussion at the conference, Tobias Just, Professor of Real Estate Economics at the University of Regensburg, questioned whether the regulation adequately reflects the significant differences between commercial property types.

And Gero Bergmann, President of the German Pfandbrief Banks Association (VDP), criticised the 150% equity requirement for project financing under Basel III as too high, noting that the cost will ultimately be borne by the borrowing companies. Walch responded that this only applies to certain projects, and noted that affordable housing can not be one of the objectives of banking regulation.