The ESRB Working Group on Real Estate Methodologies (WG-REM) published a report that provides concrete guidance for a consistent assessment of systemic risks that may stem from developments in the commercial real estate (CRE) markets and the related macro-prudential policies. Following finalization of the methodological framework developed for residential real estate (RRE) and in line with its mandate, the WG-REM explored any scope for using an equivalent approach to assess CRE systemic risks and macro-prudential measures activated to mitigate them. To this end, in view of the severe data gaps that continue to hinder effective analysis of CRE developments in European countries (Section 2 of this report), the WG-REM adopted a pragmatic two-step strategy.
First, it developed a range of operative guidance for assessing CRE vulnerabilities and related policies. This conceptually resembles the RRE framework, although it takes into account the greater heterogeneity and deeper complexities in CRE due to related wider variety of operators, greater exposure to foreign investors, and larger set of financing options. Second, the WG-REM has provided a body of advanced considerations that are intended to give practical guidance for assessing CRE vulnerabilities and related macro-prudential policies until the forthcoming statistical progress has been achieved. This contingent guidance is expected to be especially relevant in countries where data gaps have been particularly severe.
The full-fledged framework for the assessment of CRE-related systemic risks and policy responses presented in this report takes an ideally medium-term perspective. This is due to the severe data gaps affecting the ability to monitor and explain CRE market trends and their interactions with the financial system and, to a larger extent, the general macroeconomic outlook. The framework includes some data points that will conceivably become available in the near future, when statistical initiatives already launched at both the country and the EU levels have been completed. The report also states that AnaCredit data may significantly improve the risk assessment for CRE, at least with regard to interactions with credit markets.; however, the data will only be available for euro area countries The CRE aggregate derived from FINREP does not include rental housing and, therefore, does not fit the updated ESRB/2019/3 definition. For this reason, even though FINREP data are available for all countries, the indicator is an approximation and should be interpreted with caution. This will probably be remedied by data from AnaCredit, which could be available from mid-2020.
AnaCredit data will markedly improve the surveillance of banks’ exposure to the CRE market. This can be augmented by data available at the national level, to allow comparable indicators to be compiled based on the guidance provided by the Real Estate Task Force of the European System of Central Banks. However, AnaCredit currently still lacks certain indicators that might be useful for the identification of risk. These are property type, property use, information on covenants, and rental income or cash flows. The Real Estate Task Force may suggest including these indicators in the next major revision of AnaCredit. Moreover, to capture the full link between the financial sector and CRE, the banking-related scope of AnaCredit will need to be broadened to encompass all lenders and investors (nonbanks such as insurers, pension funds, and investment funds).
Nevertheless, the WG-REM offers a body of advanced considerations that aim to provide practical guidance until statistical progress has been achieved, especially in countries where data gaps have been particularly severe to date. This is to avoid any unwarranted further postponement of the regular monitoring of CRE developments in EU that are needed for timely risk detection and policy reaction. An important policy prescription still applies, that is, the extra effort should be made to achieve the urgent expected statistical progress, either through official or experimental projects. This outcome is necessary for the assessment framework presented in this report to become fully operative.
Related Link: Report (PDF)
Keywords: Europe, EU, Banking, Systemic Risk, Macro-Prudential Policy, Commercial Real Estate, Residential Real Estate, AnaCredit, FINREP, ESRB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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