Loan servicers and banks are benefitting from rising real estate prices as the value of collateral increases, revenues from property auctions improve, rental incomes increase and asset prices move higher, prompting even a reverse in provisions, amidst improving market conditions.
Thus, the link between banks and the real estate market has become a valuable reserve that can lead to capital gains and other benefits after being a concern for supervisors for a number of years about its impact on capital levels.
In addition, banks expect a significant increase in financing for both commercial and residential real estate, boosting their loan portfolios and revenues. It is noted that in the wider region of Attica, but also in many other parts of the country, strong construction activity is taking place. There is also a significant indirect impact on banks and the economy at large, as the rise in the real estate market leads to a significant increase in capital flows from rents, which real estate players channel into other investments.
After the long dip seen in real estate market that ran through the 2010s, property prices have been on a steady recovery path as of the end of 2017. The apartment price index, according to data from the Bank of Greece, from 100 in 2007 was at 59 at the end of 2017 while at the end of 2020 it recovered to 67.2.
Respectively, the price index in offices from 100 in 2010 was at 71 in 2015 while at the end of 2020 it had recovered to 81.2. The office rent index from 100 in 2010 was at 71.1 in 2016 and in 2020 it recovered to 74.3.
Price hikes are moving even faster pace this year: according to the Bank of Greece, in the second quarter of 2021 apartment prices (in nominal terms) on average increased by 4.6% year-on-year. Based on the revised data, in the first quarter of 2021 the corresponding increase amounted to 3.5%, while for the whole of 2020 apartment prices increased at an average annual rate of 4.4%.
According to the estimates from Piraeus Bank, in 2022 the price of residential properties are expected to advance at a pace of over 6%, while a rate of more than + 5% per year is estimated for 2023 and 2024.
Bank officials tell Business Daily that the benefits for lenders include:
- Increased value of collateral. Real estate financing, whether for residential real estate or commercial projects, is given in advance on the property. Thus, the higher the value of assets, the stronger the bank balance sheets, drastically reducing the risk of losses.
- A positive effect on mortgage restructurings. Rising property prices and expectations for further price hikes have a positive effect on restructuring - mortgage arrangements. The borrower has an enhanced incentive to abide by the agreement made with the bank as the value of the property goes up.
- The value of distressed portfolios is strengthened, ie the real estate that banks have acquired through auctions. At the same time, the possibilities for faster utilization of these properties expand.
- The value of real estate portfolios held as investments is enhanced, boosting capital.
- Increase in rental income. The upward trend of the real estate market leads to an increase in the income that banks have from real estate leasing.
- Fresh funding. More property deals in the market lead to an increase in financing for both commercial and residential real estate, lifting bank revenues and profitability.
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