- Indirect bank exposure to CRE is actually 40% higher than reported due to REIT lending.
- CRE exposure risks go beyond on-balance loans, spotlighting regulatory blind spots.
- Enhanced oversight may be required to manage risks from REIT-related financing.
A study revealed that banks may actually be 40% more exposed to CRE than many experts believe, thanks to verlooked REIT financing, as reported on Bloomberg.
REIT Risks
A recent study by SSRN highlights that major US banks have higher CRE exposure due to providing credit lines and term loans to REITs with CRE exposure. This indirect lending adds approximately 40% to banks’ existing CRE loan books, uncovering systemic risks that regulators may have overlooked.
Liquidity Concerns
REITs are financially constrained entities that are required to pay out dividends. They tend to draw on credit lines during periods of market distress, potentially straining bank liquidity and capital reserves. This heightened stress may lead to unforeseen outcomes that could impact the entire CRE lending landscape.
Researchers advocate for better risk management practices and fee structuring to account for the elevated risks associated with REIT credit lines, as well as including them in all future stress tests.
By The Numbers
Distress in offices stood at more than $38B at the end of 4Q23, with another $50.3B categorized as ‘potentially distressed,’ according to MSCI Real Assets.
Put into plain numbers, large U.S. banks had $345B of indirect exposure to CRE in 4Q22. That’s more than three times as much as the $109B reported nearly 10 years ago in 4Q13.
The good news is that REIT debt-to-market assets ratio were 33.8% at the end of 1Q24, according to NAREIT research. In other words, they’re not as highly leveraged as some other CRE borrowers.
Why It Matters
While attention often centers on banks’ on-balance sheet loans, SSRN cautions that overlooking indirect exposure could have dire consquences. REIT-related risks should be included in all future stress tests to more accurately gauge overall CRE exposure and potential vulnerabilities.
SSRN researchers advocate for better risk management practices and fee structuring to account for the higher risks associated with REIT credit lines, while including them in all future bank stress tests.
