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Deutsche Bank’s CEO, Christian Sewing, has expressed concerns about the future of the commercial real estate sector, citing the impact of increased borrowing costs and the evolving landscape of remote work in the post-Covid era. In an interview with Francine Lacqua on Bloomberg TV from Marrakech, Sewing noted that while Deutsche Bank’s exposure to this sector is well-contained, there are challenges on the horizon.
“It’s an asset class that deserves monitoring,” Sewing emphasized, adding that commercial real estate is likely to face a more arduous period over the next few years.
The surge in borrowing costs has become a major point of concern for banks and regulators as it poses a risk of pushing property developers into default. Over the past decade, many firms heavily invested in commercial real estate to bolster their revenues, particularly as negative interest rates eroded profitability.
The European Central Bank, responsible for overseeing Deutsche Bank and other major European lenders, has been intensifying its scrutiny of such loans. It has also initiated discussions with property appraisers to assess whether their property value estimates might be overly optimistic.
Sewing, anticipating that central banks will keep interest rates elevated due to “stubbornly high” inflation, believes it’s not inconceivable that rates may rise further. He commented, “The interest rates we see right now will be there for longer. That is something our clients need to position for, and it will also impact economic development in the coming year and 2025.”
As of the end of the second quarter, Deutsche Bank’s investment banking division had approximately €19 billion ($20.1 billion) in commercial real estate loans outstanding. The bank, in a presentation from July, expressed confidence in its ability to withstand potential risks, thanks to its “conservative underwriting standards and risk appetite frameworks that limit concentration risk.”
Sewing highlighted that the risks faced by banks in the commercial real estate sector depend on their underwriting principles, asserting that he is comfortable with the measures Deutsche Bank has taken.
While acknowledging the need for Germany to implement reforms to support its economy amid challenges stemming from higher interest rates and energy costs, Sewing also indicated that Deutsche Bank’s broader loan portfolio appears resilient. He stated, “With regard to the economy itself and the resiliency of our corporates, I’m actually seeing a picture that does not worry me. There is a lot of resiliency in the portfolio.”
