Euro area commercial properties are likely to experience falling capital values and rents until economic conditions improve, causing further losses for heavily exposed banks, the European Central Bank (ECB) said on Friday. The largest credit exposures for euro area banks are to property developers and construction firms, representing about 31,000 companies in the region, the ECB said in its Financial Stability Review.
"While bank lending to commercial property companies is to a large extent secured, significant drops in the value of collateral as well as negative developments during project or construction phases can pose material risks to banks," it said.
Income for property investors will be hit by an expected rise in tenant defaults and continued weakness of the labour market, with no respite until economic conditions improve and investor appetite for the sector returns, the ECB said.
Capital values for euro area prime commercial property fell an average 12 percent in third-quarter 2009 from a year ago, and the likelihood of values falling below purchase prices is a concern for owners due for loan refinancing, it added. Ratings agency Fitch warned earlier this week that banks in the UK, Ireland, Spain and Germany could face further downgrades due to their exposure to commercial property, especially in 2011 and 2012 when a high volume of loans fall due.
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