APAC banks grapple with rising commercial real estate risks

Office vacancies have jumped and CRE prices have dropped.

APAC banks’ mortgage risks have overall receded in the past year, but commercial real estate (CRE) risks have risen, warned Fitch Ratings.

Higher interest rates and the withdrawal of pandemic forbearance have been largely absorbed without significant impact, helping bring down mortgage risks, the ratings agency said in a report. The low unemployment and prudent underwriting in some markets should also support performance.

However, global CRE pressures from higher rates and the shift towards the working from home (WFH) set-ups have become evident in APAC.

“A jump in office vacancies has occurred in some markets, and CRE prices have dropped,” Fitch said. However, this has so far not translated into a significant rise in CRE non-performing loans, and low loan-to-value ratios generally provide a buffer against potential losses, it added.

Amongst markets, Hong Kong, Australia, and New Zealand are expected to be most impacted. 

“Performance deterioration would weigh most heavily in Australia and New Zealand due to their large mortgage exposures,” Fitch said.

Singapore banks are the most exposed to CRE, although the home market’s CRE is “more resilient.”

Property exposure is generally lower in emerging markets, with more prominent risks lying elsewhere in banks’ portfolios, except for vulnerabilities in Thailand and Vietnam, Fitch added.

“CRE exposure is higher than average in the Philippines, though risks from rising vacancies are mitigated by developers’ adequate financial buffers. China’s CRE performance has been affected by the lingering property-developer crisis,” Fitch said.