This week, the US bank New York Community Bancorp announced significant weaknesses in its internal controls, having to restate its accounts. One more consequence of what was known a month ago, when it had to provide record provisions for possible defaults on loans related to the office market. Something that, days later, caused a small German bank, Deutsche Pfandbriefbank, and another Japanese bank to falter. This circumstance takes us back to the tumultuous moments of a year ago, when the Federal Reserve came to the rescue of the US regional bank due to losses in public debt portfolios. Although we well know that each episode of financial stress is unique, that does not invalidate historical comparisons, much less the revival of ghosts from the past. The sharp increases in financial costs, but also the structural changes such as the greater percentage of teleworking, are leading to office occupancy rates at minimums and price drops of more than 20% in the United States and 10% in Europe. How much damage the deterioration of this type of loans could cause is still unknown, but in light of current data, the aggregate exposure of the financial sector seems manageable and the impact is concentrated in specific entities, reducing the risk of contagion. The 34% exposure to loans related to commercial real estate that the US regional bank has has little to do with the 11% of the 25 largest American banks. Likewise, in Europe, the total exposure is around 1.36 trillion euros, or in other words, 6.8% of the total loans granted. Much lower levels, with German banks being the exception. On the stock markets, these uncertainties have unleashed a strong punishment in the listed real estate sector, which has accumulated falls of 40% since the beginning of the rate increases. Sales are being aggressive and the sector in Europe is trading at discounts on the value of its assets of 30%. The low valuation levels seem to incorporate much of the bad news and should allow a reversal of the sector's worst performance, especially if, as we expect, the beginning of the rate cut is confirmed in the second half of the year, which will favor a decrease in financing costs and a reactivation of transactions in a market that has been affected, but not collapsed. For now, the tension will continue, given that it will take time to separate the chaff from the wheat, but as in all crises, there are also opportunities. The office real estate segment has not yet hit bottom and will continue to be under pressure, but with a view to the medium term, the prospects are more attractive in those businesses with greater exposure to logistics real estate and data centers. Likewise, within residential, housing for seniors and students are other subsectors that will enjoy growing demand in the coming years. Paulo Gonçalves is a senior market strategy analyst at Banca March. Follow all the information from Economy and Business on Facebook and xor in our weekly newsletter
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