The US banking system has becoming increasingly exposed to retail and industrial property, which could make it vulnerable to a market downturn, Credifi has warned.
In a report published on Tuesday, the real estate data firm said the banking system 鈥渉as much greater risk exposure than publicly recognised鈥�, due to the level of real estate lending.
It said there were 鈥減articular pockets of risk鈥� relating to retail and industrial assets that were vulnerable to 鈥渄eclines in global factory output鈥�.
According to Credifi data, more than $100bn (鈧�89.5bn) in new real estate loan originations in these sectors took place during the past three years.
Although the level of lending to commercial real estate declined from 2017 to 2018, 鈥渢he banking system has particularly troubling exposure鈥� to retail and industrial which it characterises as 鈥渁t-risk sectors鈥�.
鈥淧rognosticators vary, but many concur on one thing 鈥� a downturn is coming,鈥� the report said.
鈥淭his does not mean total global meltdown (like in 2008), but it does mean a decline in the economy and, by extension, in manufacturing and other productive assets.
鈥淚f and when such an event happens, industrial production and, separately, consumer spending may be affected.鈥�
Retail and industrial real estate 鈥渨ill be hit by extension鈥�, it said, 鈥減otentially harming鈥� commercial mortgages and the stability of the banking system.
Credifi also said the declining use of securitisation meant banks鈥� risk exposures were less diversified.
Risk retention rules, brought in after the 2010 Dodd-Frank Act, require banks to retain at least 5% of the risk exposure in real estate loan securitisations. Credifi said this meant commercial mortgage-backed securities (CMBS) were 鈥渘o longer the default response for risk diversification鈥�, especially in retail and industrial.
鈥淲ith the relative decline in CMBS lending, more of this risk is clustered on the balance sheets of traditional lenders,鈥� it said.
鈥淲hile loan participation and syndication markets help move this risk around among lending institutions, the risk remains a troubling part of the overall system.鈥�
Data from Commercial Mortgage Alert shows that $250bn of retail and industrial loans were issued in 2018, but less than 10% 鈥� $16bn of retail and $8bn of industrial 鈥� were securitised into CMBS.
鈥淭he implication of all of this on the banking system is profound 鈥� as it means that the system holds more loans on-book and thus is more exposed to risks in the overall economy,鈥� Credifi said.
鈥淚f the market now enters a period of cyclical risk relating to economic downturn, these banking risks are elevated.鈥�
