 French banks’ lending to the professional real estate sector in 2017Pierre Harguindeguy and Emmanuel Point Analyse et synthese from Banque de France Abstract: Against the backdrop of a still dynamic commercial real estate investment market, new lending to real estate professionals stood at EUR 73.1 billion in 2017, or a 9.8% rise on the previous year. Growth in new lending was particularly robust in France (+13.1%), which accounts for 64% of new issuance, and in the rest of the world (+23.8%), whereas in the rest of the European Union (EU) new lending slowed down by 7.3%. The breakdown of new lending by borrower type was fairly stable, with the bulk still being allocated to investors, whose market share fell by 0.4 percentage point (pp) to 55.6%. Furthermore, residential property continued to account for the largest share of new lending, up 1.2% to stand at 37.7%, followed by new lending to offices which rose by 1.5% to 23%. The rise in these two main asset classes came at the expense of lending to retail outlets which fell by 0.7pp to 13.3%, business premises down 0.4pp to 5.9% and mixed assets down 1.8pp to 5.9%. Moreover, within the office segment, Île de France saw a decline of 1.7pp to 10.5% whereas the rest of France and foreign countries saw rises of 2pp and 1.2pp respectively to 3.9% and 8.5% of new lending in 2017. The increase in new issuance came with prudent lending criteria that generally even improved: - the initial maturity of new loans rose slightly from 4.9 to 5 years; - the pre-sales rate improved on 2016, with a fall in the share of the most risky transactions, i.e. real estate construction or development programmes where none of the property had been pre-sold or pre-leased. These were down 1.5pp to stand at 17.6%, whereas transactions with a rate greater than or equal to 20% increased 2.9pp to 79.4%; - this improvement in pre-sales/pre-leasing conditions is reflected in the decline in the size of the equity contribution provided by property dealers and development companies, with the share of transactions with a rate of less than 10% – considered relatively less risky – rising by 8pp in 2017 to 45%; - this positive development was only tempered by the decline in property developers’ capital ratios: the share of property developers with a ratio of 20% or more fell by 11.6pp year-on-year (y-o-y) to 44%, whereas the share of those with the lowest capital ratios (i.e. below 5%) increased by 9.2pp to 17.6%. Gross exposures to real estate professionals stood at EUR 184.2 billion, reflecting a y-o-y rise of 6.7%, concentrated in the second half of the year; as a share of banks’ total assets and total capital, gross exposures rose by 28 basis points (bps) and 3pp respectively, to 3% and 48.8%. The different geographical areas, determined by the location of the property or the programme financed, nevertheless displayed mixed developments with growth of 7.8% in France and 11.7% in the rest of the EU but a decline of 5% in the rest of the world; France still concentrates the highest share of exposures, at 58.4%. Investors continued by far to be the main recipients, even though their share fell slightly by 0.5pp to 63.8%, while property developers and dealers saw a rise of 0.9pp to 33.9% of exposures. The breakdown of exposures by asset class shows that residential real estate (31.1%) and offices (22.8%) continued to account for the largest share of exposures, falling in the case of the former by 0.1pp and rising by 1.8pp for the latter. All other asset classes except "other assets" (whose share increased by 1.1pp), saw their share in total exposures come down, especially that of mixed assets which declined by 1.9pp to 11.2%. More moderate falls were seen for retail outlets (down 0.3pp to 17.2%) and business premises (down 0.5pp to 7.1%). Similar to new lending, risk indicators generally show that banks are cautious about the sector: - The average residual maturity of loans fell slightly from 4.7 to 4.6 years mainly due to the decline observed in the rest of the world (down 7.4 months to 3.5 years); France stood at 5.1 years and the rest of Europe at 4.2 years, almost unchanged on 2016 in both cases. Furthermore, loan amortisation plans do not suggest an excessive maturity concentration over the coming years; - Indicators relating to investors suggest an improvement in the quality of exposures: the share of the least risky transactions, with a loan to value (LTV) ratio of below 60%, increased by 1.9pp to 75% and borrowers who displayed an interest coverage ratio (ICR) of 3 or over, also the least risky, accounted for 75.3% of exposures, compared with 66.8% one year earlier. As regards the latter criterion, the sharp improvement observed can mainly be attributed to France (up 13.8pp to 73.2%); - Property developers' capitalisation levels nevertheless worsened as 33.3% of them had capital ratios below 10%, against 28.7% one year earlier (up 4.5pp). In this context, the gross non-performing loan (NPL) ratio stood at 4.36% at end-2017 for all geographical areas combined (down 59bps). While this ratio fell in France (-54bps to 2.66%) and in the rest of the EU (-151bps to 9.46%), it rose slightly in the rest of the world (up 5bps to 1.66%). Moreover, the developer segment continued to display far higher NPL ratios than the investor segment. The coverage ratio for its part rose, both as an average (up 2.2pp to 38.4%), and in the three regions (+2pp for France to 39%, +1.2pp for the rest of Europe to 35.5% and +13pp to 65.2% for the rest of the world).Lastly, despite the increase in the share of exposures subject to the Standardised Approach (1.1pp to 43%), the average risk weight of exposures fell slightly (-1.7pp) mainly due to the decline in the risk weight of exposures subject to both the Standardised Approach (-2.4pp to 80.6%) and the Advanced Approach (-2pp to 37.9%). Keywords: professional; real; estate; sector (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bfr:analys:93 Access Statistics for this paper More papers in Analyse et synthese from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC. |
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