Central Bank monitoring possible commercial property crash as one of its ‘main risks’

The possibility of a commercial property crash is “one of the main risks” the central bank is currently monitoring, according to one of the regulator’s deputy governors.

Vasileios Madouros, deputy governor for monetary and financial stability at the Central Bank of Ireland, has said that there has been a “combination of cyclical and structural shocks” to the commercial property sector recently.

Speaking at the Federation of International Banks in Ireland (FIBI) conference in Dublin on Tuesday, Mr Madouros confirmed that weak pricing in the real estate market and the possibility of a crash is “one of the main risks that we [the Central Bank] are looking at”.

He said that cyclical shocks such as rising interest rates have coupled with “persistent” structural shocks such as people not working from offices as much, and people shopping more online.

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He added that shocks have led to “a significant fall in valuations” in the commercial property sector, and “it is still ongoing”.

“We have seen very significant adjustments in valuations globally in Europe, and in Ireland, and these adjustments are continuing. It has been orderly so far, but it is an area where investors might make losses and creditors might also make losses,” he said.

Mr Madouros said that as the property market is a “big area of focus” for the Central Bank, there is an awareness that “the nature of financing of commercial real estate has changed quite substantially” compared to the last property crash in 2008.

“If you look at the run up to the financial crisis, a lot of it was financed by the domestic banking system. Now you’ve got a lot more participation by nonbank financial intermediaries, and more broadly from international investors,” he said.

He said that while more diversified and international financing does benefit Ireland’s national outlook, it creates vulnerability to global shocks, and can make financing more volatile.

He noted that the Central Bank is focusing on the risk, and taking steps including the introduction of leverage limits and guidance for property funds, which form part of the regulator’s wider macroprudential framework for nonbank entities.

Speaking more broadly about the economy, Mr Madouros said that there has so far been a “relatively orderly” response to rising interest rates, but there is still a risk that inflation will prove “more persistent than currently expected”.

“If that were to crystallise that would require more forceful policy actions by [central banks]. Which is why it is critical that central banks have taken the action early on to make sure that inflation doesn’t become entrenched in the economy,” he said.