Commercial Real Estate (CRE) remains a cornerstone of the financial landscapes across Asia-Pacific, with significant implications for banks and financial institutions. Recent analyses from our colleagues at Moody's Ratings shed light on the current state of CRE exposures, particularly in Singapore, China, and Hong Kong, and highlight the varying degrees of risk and resilience among banks in these regions.

Here are our takeaways:

CRE exposures in Asia-Pacific banks

According to Moody’s Ratings, CRE exposures account for about 12% of total loans at APAC banks, with notable risks in Hong Kong SAR, China, and Vietnam. These regions face heightened asset vulnerabilities due to fluctuating real estate markets, including shifts in sales volumes, price volatility, and occupancy rates. While banks in these regions must navigate a complex environment where asset performance and macroeconomic conditions significantly influence CRE-related asset quality, Moody’s Ratings analysts believe that the presence of buffers such as capitalization, loan-loss reserves, and collateral coverage can mitigate unexpected risks.

Singapore's property market: stable yet cautious

The three largest Singapore banks – Development Bank of Singapore (DBS), OCBC, and United Overseas Bank (UOB) – have substantial exposures to the property sector, representing around one-third of their total loans. However, the impact of property market risks varies among Singapore banks due to differences in their geographic exposures and the credit quality of borrowers. OCBC, for instance, is viewed as having a modestly riskier property exposure compared to DBS and UOB. This is attributed to its higher growth in property financing, greater share of non-Singapore property loans, and higher exposure to the non-Singapore office segment.

Singapore banks are also likely to find themselves affected by structural problems in property markets in mainland China, Hong Kong, and the US. Despite this, the banks maintain robust credit buffers, including collateralization, credit reserves, and strong pre-provision profits.  In general, the risks associated with these exposures are expected to be mitigated by the stable economic conditions within Singapore itself.

Hong Kong and Greater China: insurers vulnerable to lingering risks

China's property sector has been under prolonged stress, posing significant risks to the profitability of Chinese insurers. With substantial investments in commercial real estate, insurers face a landscape filled with uncertainties.

While Chinese insurers’ property investments are generally moderate relative to their total asset bases, they can be significant compared to their capital. For some insurers, property exposures exceed 15% of shareholders' equity. This level of exposure means that significant losses could materially impact profitability and even capital stability.

Alternative investments, such as debt investment schemes and asset management products tied to CRE, pose the greatest uncertainty. These investments are complex, and their risks are hard to assess due to the lack of fair market valuation and clear default data. As defaults and delinquencies come to light, underestimating impairment charges could severely undermine insurers' profitability.

In Hong Kong, the office sector is particularly vulnerable due to high vacancy rates, increased office supply, and declining rental yields. These factors contribute to weakened cash flows for borrowers and increased refinancing risks.  Investments in other commercial properties, such as shopping malls, are also under pressure due to declining rental yields amidst weak economic conditions. The expected steady cash flows from these properties have not materialized, and selling these properties quickly during a downturn is challenging due to a lack of immediate demand. Even in top-tier cities like Guangzhou and Hangzhou, rental and occupancy rates are falling, further squeezing returns from these investments.

Asia-Pacific CRE: complex challenges, nuanced views

Navigating the complexities of CRE exposures requires a nuanced understanding of regional market dynamics and the ability to maintain strong credit buffers. Singapore banks, while facing external risks from Greater China and the US, benefit from a relatively stable domestic property market and robust financial structures. Continuous monitoring and selective credit underwriting will be crucial for these banks to manage and mitigate the evolving risks in the CRE sector.

Additionally, the ongoing stress in China's property sector highlights the need for vigilant risk management among insurers. While overall property investment exposure is moderate, the potential impact on capital and profitability is significant. Insurers must adopt prudent investment strategies and maintain adequate provisions to navigate these challenges effectively and safeguard their financial stability.

Want to learn more? Access content related to this campaign*:

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