Even after Signa “fire on the roof”: high-risk business with commercial real estate

Industry representatives are confident and believe that the low point in the real estate industry will (soon) be overcome. But interest rates and construction costs are still high, and the sand in the economy’s gears won’t disappear overnight. Economic forecasts had to be revised downwards several times this year.

Financial market supervision and National Bank are concerned that there are greater risks in the commercial real estate market in particular than are previously known. If these risks were to materialize, this could in turn have negative consequences for the banks and the entire Austrian economy.

The experts see the mega-bankruptcy of the Signa empire around former star investor Rene Benko as nothing more than a warning and something like the tip of an iceberg. There is currently “fire on the roof” in the sector. The insolvency of the Signa Group is not an isolated case. “There are many medium-sized developers in the three-digit million range who are also in difficulties,” said FMA board member Eduard Müller at the crowded “15. Supervisory Conference” in Vienna.

“Striking” rate

The National Bank’s chief economist, Birgit Niessner, also presented the audience with data that is somewhat worrying. In commercial real estate, the rate of non-performing loans rose from 1.7 to 4.8 percent in one year.

And a “striking” 37 percent of commercial real estate loans have a so-called “loan-to-value ratio” of over 100 percent or are unsecured at all.

To explain: The loan-to-value ratio measures the relationship between the loan amount and the value of the property and is a measure of the risk of a loan for the bank.

In view of the data, Ursula Hauser-Rethaller, banking supervision expert at the FMA, defended the new equity buffer of one percent that was decided last week and which banks must comply with for commercial real estate loans from 2025.

However, bank representatives such as Claudia Höller, board member of BKS Bank, consider this buffer to be extremely dispensable. “I have no imagination as to what a sectoral system buffer – especially if it comes next year – is supposed to bring in terms of financial stability,” says Höller.

Signa: “A Tragedy”

In their opinion, the various banking regulations, especially Basel IV, adequately cover real estate risks. Banker Höller: “Signa is a tragedy for me. But I would neither demonize nor write off the commercial real estate sector because of that.”

It is undisputed that Austria’s banks are disproportionately involved in commercial real estate compared to the EU. According to Hauser-Rethaller, the exposure of domestic banks is 127 billion euros. That’s around 13 percent of the balance sheet total or around a quarter of Austria’s annual economic output. At 14 banks, loans in the commercial real estate sector even exceed 40 percent of total assets.

“This high proportion of commercial real estate loans, where the loan-to-value ratio is very high, is also a risk to which we are unfortunately particularly exposed in Austria. As a supervisory authority, the FMA is obliged to react to changes in the risk situation,” explains the FMA expert.