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1. Risks arising from corrections on the real estate markets →
The commercial and residential real estate markets have been under pressure since mid-2022. Some commercial real estate risks have materialised. In some cases, this has resulted in considerable value adjustments and write-downs on exposures at certain banks and insurers.
The strained situation on the German commercial real estate market, which includes commercial residential real estate, persisted in 2024. This was increasingly evident in the rising numbers of non-performing loans (NPLs) at German banks, at both significant institutions (SIs) and less significant institutions (LSIs). From mid-2024, there were clear signs of a decline in risk on the residential real estate market.
Commercial real estate
Overall, the risks to financial stability posed by the commercial real estate market remain elevated. While these risks alone are not expected to jeopardise the functioning of the financial system, individual institutions can be heavily burdened by major loan defaults in their portfolios. The German and US real estate markets are particularly important for companies supervised by BaFin.
Banks that are focused on financing commercial real estate and that may be unable to compensate for losses in this segment through other business areas, as well as project developers, are therefore exposed to increased risk due to their specific business models.
Price declines halted for now, new business continues to falter
Commercial real estate loans are highly important for the German banking sector. In 2024, they accounted for over 9% of the aggregate total assets of German banks. Prices for office and retail real estate, as measured by the vdp Property Price Index, fell by around 17% between mid-2022 and the third quarter of 2024, while prices for commercial residential real estate decreased by around 8%.
Since the beginning of 2024, the price trend has recovered somewhat from a very low level. However, a stable trend is yet to be observed and the commercial real estate market remained fragile at the end of 2024 (see Figure 1).
Figure 1 : Prices for commercial real estate in Germany by central property types
Source: BaFin diagram using data from the Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken – vdp) e. V., as at 26 November 2024
Transaction volume and new lending business remain at a low level
In 2024, weak economic growth, high interest rates, high construction costs and persistently high core inflation placed a burden on the German commercial real estate market. In addition, the increase in working from home and the growth in online retail have been clouding the commercial real estate market for some time. These factors, which determine supply and demand on the commercial real estate market, alongside the low transaction volume, suggest that further price declines are possible.
In the US, prices on the commercial real estate market have fallen by around 19% since March 2022. Office real estate prices in particular are under pressure with an average vacancy rate of around 21%. The situation remains tense in particular as a result of persistently high core inflation and interest rates that – despite recent cuts – remain high.
These developments were also reflected in lending behaviour for commercial real estate. New lending business in the three central commercial real estate submarkets – office real estate, commercial residential real estate and retail real estate – had not yet recovered sustainably from the slump in the fourth quarter of 2022 and remained weak in 2024 by historical comparison (see Figure 2).
Figure 2: Development of new lending business for commercial real estate in Germany by central property types
Source: BaFin diagram using data from the Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken – vdp) e. V., as at 26 November 2024
Further deterioration in credit quality
The main risks for banks are posed by a combination of loan defaults and decreases in the value of collateral. Since the end of 2022, the NPL ratio for loans collateralised by commercial real estate has risen noticeably, particularly among SIs due to their relatively high exposure to US commercial real estate. Within an 18-month period, the NPL ratio of all German institutions in this portfolio almost doubled from a low starting level. The rise in NPL ratios in the commercial real estate loan portfolios of all German banks continued: in the third quarter of 2024, the aggregate rate was 4.47%. In response to these developments, SIs and LSIs significantly increased risk provisioning for their commercial real estate loan portfolios, particularly towards the end of 2023. A slight increase was also observed in the first half of 2024.
Follow-up financing of (existing) loans poses a particular risk. More than half of the volume of current loans had interest rates below 3% at the end of 2024. In 2025 and 2026 alone, negotiations are pending for follow-up financing for commercial real estate loans totalling 100 billion euros. This accounts for around 10% of the total volume of commercial real estate loans.
Loans for project developers also harbour high risks for banks since project developers make their investments through advance payment. The factors weighing on the market, such as high interest rates, mean that properties are less in demand or that projects are not realised at all. This can result in lower returns or difficulties in the repayment of investment loans. As a result, lenders are exposed to a considerable credit default risk.
Even without taking collateral into account, the possible direct consequences of the Signa Group's insolvency are unlikely to lead to a breach of the “hard” capital requirements at any German bank.
The rise in non-performing loans reported and the higher risk provisioning show that risks in the commercial real estate market are increasingly materialising. The difficult market situation will continue to place a burden on banks’ earnings in this segment for some time to come.
Insurers and Pensionskassen
Insurers’ commercial real estate exposure has increased slightly in recent years – particularly in portfolios held indirectly via real estate funds. Insurers subject to Solvency II reported investments with a total commercial real estate exposure of just under 164 billion euros in the second quarter of 2024. Investments in commercial real estate thus accounted for around 8% of total capital invested. Pensionskassen were more heavily invested in commercial real estate with a share of around 12%.
A representative survey conducted by BaFin in 2024 on the investment behaviour of insurers and Pensionskassen showed that the companies surveyed negatively adjusted the value of their portfolios of (predominantly) commercially used real estate, above all office real estate, by around 7% as at 31 December 2023 compared to the year-end figure for 2022. In the financing of real estate (projects) the adjustment was 11.5%.
Even if risks materialise in individual cases, the overall risk appears to be manageable for the insurance industry. A key reason for this is the lesser significance, measured against total assets, of commercial property risk compared with other market risks, such as interest rate and spread risks for life insurers or underwriting risks for non-life insurers.
In the past, some insurers have invested directly or indirectly via funds in real estate project developers, including the insolvent Signa Group. Losses were incurred due to the insolvency of individual real estate companies. This experience showed that insurers need to adapt their risk management. More complex and riskier investments require risk management that is geared towards such investments, alongside adequate staffing.
Real estate funds
German asset managers (Kapitalverwaltungsgesellschaften) account for a large share – over 30% – of the European market for open-ended real estate funds. Retail funds have recorded sustained net liquidity outflows since the beginning of 2024. This could intensify the pressure to sell and thus further exacerbate the fall in prices for commercial real estate. To date, there have been no significant net liquidity outflows from special funds.
In 2024, there was sufficient liquidity for real estate funds in the market. It is not yet clear whether this will remain the case or whether individual funds will face liquidity bottlenecks. Where available for specific funds, German asset managers can use liquidity management tools such as redemption periods, redemption gates or minimum holding periods in order to better manage the liquidity of the open-ended investment funds for which they are responsible.
An annual BaFin survey on liquidity management tools as at 31 December 2023 revealed that around 80% of special real estate funds had rules regarding redemption periods and that the agreed redemption period was usually six months. For retail real estate funds there were statutory minimum holding periods (24 months) and redemption periods (12 months). The measures were intended to have a preventive effect before German asset managers were forced to completely suspend the redemption of unit certificates. However, by September of 2024 only three special funds had made use of this.
In order to compensate for the weak interest margin in the years of low interest rates, individual banks tapped into alternative sources of income, for example by significantly expanding their own investments in real estate. For savings banks (Sparkassen) and cooperatives (Genossenschaften), own investments in real estate accounted for over 3% of total assets in 2023. Real estate funds accounted for a significant proportion of institutions’ own investments: at the end of 2023, German banks held around 57 billion euros in real estate funds. In 2023, the ongoing downturn on the real estate markets in Germany and abroad increasingly led to value adjustments in real estate funds and the need for write-downs at the affected institutions.
Residential real estate
Prices on the residential real estate market have also been affected by rising interest rates and high inflation since 2022. This reduced some of the overvaluations that had arisen in previous years. Over the course of 2024, there were clear signs of a decline in risks on the residential real estate market.
Market stabilising, but there is still progress to be made
Following a relatively sharp drop in prices for owner-occupied residential real estate on a national average from 2022 onwards, the residential real estate market increasingly stabilised over the course of 2024. Prices have begun to rise slightly again (see Figure 3).
According to the vdp Property Price Index, this process was somewhat faster in the top seven cities – Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf – compared to nationwide figures. Segment-specific data from the transaction platform Europace show a particularly positive trend for existing buildings. Although they had been particularly affected by price declines during the market downturn starting in 2022, existing buildings were overall around 3.9% more expensive in November 2024 than in January 2024 (market as a whole 2.9%). Prices for new builds remained stable. The more positive trend in existing buildings compared with new builds is partly due to the continuing rise in construction costs. This negatively impacted demand for new builds while existing buildings gradually became financially more attractive to buyers again.
Figure 3: Prices of residential real estate in Germany
1 Weighted by transactions. Calculations by the Deutsche Bundesbank on the basis of price data from bulwiengesa AG. Quarterly data.
Source: BaFin diagram based on calculations by the Deutsche Bundesbank, as at 30 September 2024
By the end of 2022, new lending had slumped by up to 50%. Since then, there has been an incremental recovery, although levels remain low. From January to November 2024, around 22% more residential housing loans were granted to private households than in the same period in 2023. The annual growth rate for portfolios of housing loans to private households, which had fallen in previous years, stabilised in 2024 and amounted to 0.9% in each of the first two quarters and 1.0% in the third quarter.
Figure 4: Growth rates of housing loans granted by domestic banks*
* Data adjusted for statistical changes 1) Including self-employed and sole traders. 2) Excluding self-employed and sole traders.
Source: BaFin diagram based on calculations by the Deutsche Bundesbank, as at 30 September 2024
Slightly stricter credit guidelines, low loss rates
As shown in the Bank Lending Survey (BLS) for Germany, which was published by the Deutsche Bundesbank in October 2024, banks slightly tightened their lending standards for private residential property loans in the first three quarters of 2024 compared to the preceding quarters.
The loss rates – i.e. the ratio of losses from lending business to outstanding loans collateralised by residential property – remained at a low level. Levels remained constant in 2023 compared to the previous year, while the picture was different for commercial real estate. Lenders’ value adjustments for current loans also remained at a moderate level: in the third quarter of 2024, loan loss provisions for loans to private households collateralised by residential real estate amounted to 1.16% and were thus slightly higher than the average for the previous quarter. The loan loss provision ratio describes the ratio of loan loss provisions to the loan portfolio. One reason for the slight increase in the loan loss provision ratio was the higher interest and principal repayments, which can lead to problems with follow-up financing.
The positive trend on the residential real estate market is based on latent excess demand. Earlier price reductions, increases in real wages and the recent fall in mortgage interest rates have already made residential property somewhat more affordable. If this trend continues and the situation on the labour market also remains stable, it is possible that the palpable demand on the rental market will also be felt in the market for residential real estate, which could stabilise the market in the long term. However, if the economy continues to weaken and unemployment rises significantly as a result, there is a risk of setbacks and increasing loan defaults.
BaFin’s line of approach
- The countercyclical capital buffer for all domestic exposures and a systemic risk buffer for private and commercial residential real estate loans , which were introduced by BaFin in 2022, have been effective since February 2023. The buffers are intended to make the banking system more resilient by strengthening institutions’ capital base in stress situations. BaFin is closely monitoring the risk situation on the real estate markets using the relevant data for macroprudential purposes and will react to changes in financial stability risks if necessary.
- BaFin will continue to closely supervise in particular those credit institutions with comparatively large portfolios of commercial real estate loans. In 2025, BaFin will continue to conduct various cross-sectional analyses in order to better assess the risks arising from corrections on commercial real estate markets. As part of this, BaFin will monitor concentrations and defaults in this segment, in addition to (new) lending for commercial real estate financing.
- BaFin will also continue to analyse whether credit institutions evaluate commercial real estate financing at sufficient intervals. To this end, BaFin is carrying out a higher number of impairment tests.
- BaFin conducts special inspections of institutions that have high risks in commercial real estate loans and an increased need to write down properties in their own securities accounts (Depot A).
- In 2024, BaFin investigated the investment behaviour of insurers and Pensionskassen. On this basis, it will carry out individual analyses in 2025 at specific companies showing indications of potential shortcomings. One aim is to examine the risk management of companies with a significant proportion of alternative investments. This also includes real estate exposures.
- As part of its financial reporting enforcement in 2025, BaFin will focus random sampling examinations on the recoverability of financial and non-financial assets . This area of emphasis also extends to the recoverability of accounts receivable at banks. In addition, BaFin’s financial reporting enforcement examinations will pay close attention to the valuation of significant real estate portfolios of companies outside the banking industry.
- BaFin will also continue to closely supervise retail funds with special liquidity situations.
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