· Economies with easier financial conditions, experienced a smaller decline in commercial property
· To ensure the banking sector’s resilience, large drops in commercial real estate prices should be stress-tested
· Disruptions in the commercial real estate market could, in turn, threaten financial stability
Commercial real estate valuation assumptions used by banks should also be reviewed to ensure adequate provisions
According to IMF Blog, Disruption in Commercial Real Estate Sector has the potential to threaten financial stability.
Tighter financial conditions have a direct impact on commercial property prices because they make it more expensive for investors to finance new deals or refinance existing loans, lowering investment in the sector. They may also have an indirect effect on the sector by slowing economic activity and lowering demand for commercial property such as shops, restaurants, and industrial buildings.
Blog is written by Andrea Deghi, who is a Financial Sector Expert in the Global Financial Stability Analysis Division of the IMF’s, Fabio Natalucci, is the Deputy Director of the Monetary and Capital Markets Department and Mahvash S. Qureshi who is division chief in the Monetary and Capital Markets Department of IMF’s.
In general, economies with easier financial conditions, such as lower real interest rates and other market conditions that make it easier to obtain financing, experienced a smaller decline in commercial property prices. Prices recovered sharply on normalisation of situation.
Commercial property prices have also been higher in countries that implemented less stringent public containment measures to control the virus’s spread, implemented larger fiscal support packages, and have a higher vaccination rate.
To ensure the banking sector’s resilience, large drops in commercial real estate prices should be stress-tested to inform decisions about the adequacy of capital buffers for commercial real estate exposures.
Disruptions in the commercial real estate market could, in turn, threaten financial stability due to the sector’s interdependence with the financial system and the broader macroeconomy. Financial regulators must maintain vigilance in order to mitigate such risks.
Commercial real estate valuation assumptions used by banks should also be reviewed to ensure adequate provisions. To mitigate systemic risks in regions where nonbank financial institutions are important players in commercial real estate funding markets, efforts should be focused on broadening the reach of macroprudential policy to include these institutions.
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