German regulator steps up warnings on property as industry reels

By Tom Sims and Frank Siebelt

FRANKFURT (Reuters) -The head of Germany’s financial regulator said on Tuesday that 2024 will be less rosy for bank profits and that real estate was an increasing risk, in stepped-up warnings as Europe’s largest economy undergoes its biggest property crisis in decades.

The nation’s financial regulator BaFin has long warned of risks in the once-heated property sector, but the comments from its president Mark Branson in a podcast and a separate BaFin report took on a more pessimistic tone as the industry struggles with higher interest rates, insolvencies and a sharp slowdown in transactions.

“Many went overboard in times of extremely low interest rates. That is why a necessary correction has come,” Branson told the Finanz-Szene podcast, calling commercial real estate “risk No. 1”.

The problems of developers and real estate companies have resulted in falling prices and a sharp slowdown in transactions, which BaFin said may continue.

“The difficult situation … is likely to impact the earnings of affected banks for a longer period of time and require higher risk provisioning,” BaFin said in a separate report outlining risks the regulator is focusing on for 2024.

In addition to the property sector, BaFin is also eyeing IT risks from cyber outages and outsourcing of services by the businesses it regulates.

Branson, noting that higher interest rates and the income that generates was a boon to banks in 2023, said bank profitability in 2024 will be “more difficult”.

“A lot of costs in the loan books come with a time lag and we will see that in 2024 and in the following years,” he said.

(Reporting by Tom Sims, Editing by Linda Pasquini, Kirsten Donovan, Ed Osmond and Sharon Singleton)