Germany's Aareal warns on health of U.S. office loans (updated)

Aareal Bank AG

29/02/2024 11:24

(Repeats to additional subscribers)

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      Bank posts highest loan losses in at least a generation
    

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      Bank big in U.S. market
    

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      Aareal sees no quick turnaround in market
    

  
    By Tom Sims and John O'Donnell
       FRANKFURT, Feb 29 (Reuters) - Troubled German lender
Aareal  ARLn.H  said on Thursday that a quarter of its 4 billion
euros ($4.3 billion) in loans for U.S. offices were likely to go
unpaid and that there could be worse to come as a property rout
takes hold.
    The bleak message underscores the severity of a property
slump, hitting the value of empty offices hard and rattling
investors on both sides of the Atlantic.
    "Will the market turn around? It doesn't look like it,"
Chief Executive Officer Jochen Kloesges told journalists.
    "2024 will remain challenging. We expect that the U.S.
office market will stay in flux for longer," he said, adding
that some U.S. offices had plunged 50% in value.
    Aareal, based in Germany but operating globally with a
quarter of its business in the United States from New York to
San Francisco, is aiming to pare down about half of the 1
billion euros in so-called non-performing loans by the end of
March.
    It said it wouldn't need fresh capital as it navigates the
crisis.
    The sector has been undermined by factors ranging from
rocketing interest rates to post-pandemic working-from-home,    
sapping demand for offices in the United States and Europe.
Investors worry this could trigger wider economic problems and
spill over to banks.
    Aareal is one of the biggest property lenders in Germany,
Europe's largest economy, and together the nation's banks are
among the continent's heaviest lenders for the stricken
commercial property sector.
    Investors are worried about banks' lending to the sector,
especially in the United States, where refinancing difficulties
and lower office occupancy have hit commercial real estate in
recent months, raising concerns that loans will go unpaid. 
    In another sign of the malaise, Aareal earmarked 441 million
euros in provisions for soured loans in 2023, the most in at
least a generation and surpassing a recent peak at the height of
the pandemic. 

    DOMESTIC BLUES
    Aareal's domestic market of Germany is also in its worst
real estate slump in decades - characterized by insolvencies,
halted construction and a freeze in property deals. Commercial
property prices fell 10% in 2023, in a sharp acceleration of
their decline this decade. 
    Its domestic competitor Deutsche Pfandbriefbank  PBBG.DE 
(PBB), which like Aareal is almost exclusively focused on
property financing, has come under particular pressure in recent
weeks. 
    PBB's shares have slumped nearly 40% this year as it doubled
provisions for soured loans and got a credit rating downgrade to
a notch above "junk". It has issued a series of statements to
assure investors.
    PBB, which gets a new CEO on Friday, reports its earnings
next week.
    Aareal last year removed itself from the stock market after
a buyout group took the bank private, but it issues bonds.
    One of its riskiest bonds - its so-called AT1 - has slumped
in value, though not as steeply as PBB's.
    Credit-rating agency Fitch recently cut Aareal's rating and
warned that it would suffer if there is "additional severe
stress in the U.S. office property market, or spill-over to
European property markets". 
    Last year, Aareal flagged potential credit losses of up to
210 million euros but ended up doubling its forecast as the year
progressed. 
 ($1 = 0.9217 euros)

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Higher provisions, lower profits     https://reut.rs/49sV3HJ
Real estate concerns    https://reut.rs/49qWK8m
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 (Editing by Miranda Murray, Gerry Doyle and Keith Weir)
 ((Tom.Sims@thomsonreuters.com; +49 30 220 133 645;))