Global Banks and Investors Face Massive Losses on US Commercial Real Estate
The US commercial real estate (CRE) market is facing a massive crisis, and the repercussions are being felt by banks and investors worldwide. The exposure to these losses has spread far and wide, with various entities suffering significant financial setbacks. While the focus has been on the office sector of CRE, which requires demolishing older office towers and building new structures, other areas of the market are also experiencing challenges.
US banks have already incurred losses on office CRE loans, and more losses are expected in the future. As a result, their profits have taken a hit, leading to share price declines and dividend cuts. Some smaller banks with heavy exposure to office CRE may even face closure. However, the impact of these losses is not limited to US banks alone.
International banks have also been affected by the US CRE crisis. Aozora Bank, a mid-sized Japanese bank, disclosed nearly $2 billion in US office loans and suffered heavy losses as a result. Canadian banks have set aside capital to deal with expected losses from their US CRE loans, and European banks have also been impacted. Deutsche Bank AG, for instance, has quadrupled its loan loss provisions for US CRE.
Now, Fitch Ratings has released a report discussing the losses on US CRE loans held by banks in the Asia-Pacific (APAC) region. The report highlights the potential impact of exposure to troubled segments of the US CRE market, particularly office and retail properties. Japan’s Aozora Bank’s loss in the fourth quarter of 2023 due to bad loans associated with US real estate lending serves as an example.
While Fitch Ratings acknowledges that APAC banks’ exposure to US property, including CRE, is generally less than 2% of lending where publicly disclosed, it notes that many banks do not provide specific breakdowns of this data. For example, Shanghai Commercial Bank Limited has a higher exposure to the US market, accounting for 29% of loans (12% of assets) in June 2023, but the bank does not disclose the share that is CRE-related. Similarly, China CITIC Bank International Limited has US exposures accounting for around 5% of loans (2.7% of assets), but not all of it is CRE-related.
Macquarie Group Limited from Australia may have above-average US exposure, but this is primarily in the less-troubled power and infrastructure segments through its asset management business. Fitch Ratings also acknowledges that some APAC financial institutions, including those not rated by Fitch, potentially have higher US CRE exposure levels compared to the average for Fitch-rated APAC banks.
However, Fitch Ratings emphasizes that for the small number of outliers with significantly higher US CRE exposures, lending is generally limited to select clientele with low loan-to-value ratios, reducing vulnerability to US CRE asset price declines. Additionally, banks may be lending against US CRE segments other than office properties, although Fitch expects weakening across retail, hotel, multifamily, and industrial properties through 2025.
Overall, Fitch Ratings states that exposure to US CRE among the banks it rates in the APAC region is generally low. However, it acknowledges that there may be a small number of banks across the region facing a greater risk of losses.
This report by Fitch Ratings highlights the global nature of the US CRE crisis. While initial concerns focused on US banks, it is now evident that global investors and banks are also on the hook for these losses. The fact that the 4,000 US banks hold only a portion of this debt suggests that the situation may not be as dire for them as initially feared.
As the fallout from the US CRE crisis continues to unfold, it is clear that the impact is far-reaching. Banks and investors worldwide are grappling with massive losses, and the future of the US CRE market remains uncertain. Only time will tell how the industry will recover from this structural crisis and what measures will be taken to mitigate further damage.
