N° 152 : The financing of real estate professionals by French banks in 2022

In France, the commercial real estate market remained buoyant in 2022. According to BNP Paribas Real Estate, after two consecutive years of downturn in 2020 and 2021, investment in French corporate real estate rebounded in 2022 (+6.2% compared to 2021), with significant investment levels in the second and the third quarters (Q2 and Q3; Chart 2). According to data published by ImmoStat, take-up of office space in the Ile-de-France region continued to increase in 2022 (Chart 4). The immediate supply of office space also increased, albeit at a slower pace than demand (Chart 5), resulting in a shorter average time-to-market in 2022.

However, there is evidence of a market slowdown from Q4 2022 onwards. Amid continuing macroeconomic uncertainties and structural changes affecting the industry (including the emergence of remote working arrangements and e-commerce), financing conditions have tightened. Investment fell in Q4 2022 (-42.4% compared to Q4 2021) and this trend continued in Q1 2023 (-24.6% compared to Q1 2022). However, performance remains uneven across asset classes (Chart 3): investment in office property recorded a sharp drop compared to its 10-year average; similarly, investment in business premises and in logistics plummeted in Q1 2023. Conversely, investment in the retail sector is booming, and the hotel sector appears on a steady path to recovery, with an uptick in investment in Q1 2023.

Office take-up in the Île-de-France region also fell in Q4 2022 (-3.7% compared with Q4 2021) before dropping further in Q1 2023 (-38.8% compared to Q1 2021), while the immediate supply of office space in the Ile-de-France region reached its highest level in Q1 2023. This imbalance led to an increase in the average time-to-market in Q1 2023 (+3 months, reaching 2.3 years).

Lastly, according to statistics published by ImmoStat, the price per square metre (sqm) of office investment in the Ile-de-France region fell by 2.5% in 2022 and this downward trend continued in Q1 2023 (-2.3 % compared to Q4 2022; Chart 7). Office rents remained high in 2022 (+1.7% for new or structurally renovated office property, and +5.8% for existing office property; Chart 8), thanks in particular to the sustained, very high rate of accompanying measures (24.4% on average in 2022; Chart 9). Office rents for existing office property, on the other hand, fell by 2.1% in Q1 2023.

In this context, according to data provided by the five main French banking groups in the context of the survey conducted by the Autorité de contrôle prudentiel et de résolution (ACPR), new loans to real estate professionals showed a slight increase in 2022 (+1.7% compared to 2021; Chart 10) thanks to record high production in the first quarter (Q1), despite a marginal decrease in Q2 (-4.8% compared to Q2 2021).

The evolution of the production structure reflects a certain degree of normalisation of the market, as the segments affected by the health crisis (real estate located abroad, offices and investors) saw their share of production increase:

• Real estate located in France continued to account for the majority of the production, but its relative share declined slightly (-2.7 percentage points (pts) to 62.3% compared with 2021; Chart 11) which benefitted real estate located abroad (+2.7 pts to 37.7%), especially in the rest of Europe (+2.5 pts, reaching 24.7%);

• Residential real estate remains predominant, but its share in the production declined (-2.8 pts reaching 40.6%; Chart 17). This benefitted business premises (+1.4 pt reaching 9.9%) and office real estate (+1.7 pt to reach 18.8%), although the share of the latter has yet to return to its pre-health crisis levels;

• Investors still account for the largest share of the production. Their relative share increased (+0.6 pt to reach 53.3 %; Chart 14), while the share of real estate developers and property dealers went down (-0.8 pt to reach 45%).

The overall gross exposure of French banks to real estate professionals increased by 6.7% in 2022, compared to 9.3% in 2021 (Chart 20). This relatively sustained increase is mostly attributable to buoyant production in Q1 2022. In relative terms, these exposures continued to rise, comparatively to total own funds (+3.6 pts to reach 57.6 %; Chart 21), but still account for a modest portion of total assets (+0.1 pt at 3.3%).

Finally, risk indicators remain sound:

• The share of transactions for which the presales interest rate is nil continued to decline after a peak in Q1 2021, reaching 26.4% in 2022 (-6.6 compared to 2021; Chart 44);

• The share of loans with a loan-to-value (LTV) ratio < 60% remains predominant, standing at 75.7% in December 2022 (Chart 55). Loans with an interest coverage ratio (ICR) ≥ 2 remain an overwhelming majority at 79.2% in December 2022 (Chart 58), as does the share of transactions with a debt-to-service coverage ratio (DSCR) ≥ 1.5 (60.5% in December 2022; Chart 61);

• The initial maturity of loans increased slightly (+1 month reaching 4.1 years; Chart 41) but remains relatively shorter than its recorded average since 2015. Meanwhile, residual maturity decreased marginally (-1 month reaching 3.7 years; Chart 46);

• The share of gross doubtful loans outstanding reached an all-time low overall (2% in December 2022, i.e. -7 basis points (bps) compared to December 2021; Chart 29) as did the share of restructured exposures (-17 bps reaching 1.16%; Chart 34);

• Over the same time frame, the provisioning rate also decreased by 1.3 pt, reaching 35.8% (Chart 36), notably owing to the write-off of old highly provisioned loans;

• Finally, the average risk weight applied to exposures decreased (1.7 pt to reach 55.8 %; Chart 64), mainly due to an increase in the share of exposures under the internal ratings-based approach. However, the risk weight applied to such exposures, which are more sensitive to underlying risks, increased by 4.8 pts over the period. Banks using internal models therefore consider that loan quality has deteriorated.

Despite the fact that the findings of the present analysis remain positive overall, banks should remain particularly vigilant in light of ongoing developments in the industry, which is clearly showing signs of a turnaround. Banks should in particular ensure that their risks are closely monitored, especially as regards the valuation and rental situation of the assets being financed, and that any deterioration in the quality of their exposures on real estate professionals is reflected without delay in their balance sheets and profit and loss accounts.

In order to paint a more accurate picture of the risks to which banks are exposed, with more frequent updates, and in order to comply with a recommendation from the European Systemic Risk Board, the ACPR has initiated an overhaul of its survey, which will come into force in the second quarter of 2023.