Global Commercial Real Estate Pressure Could Impact Banks

In a recent address at the Future of Finance Forum 2024 hosted by the Bretton Woods Committee in Singapore, RBI Governor Shaktikanta Das highlighted concerns regarding the global commercial real estate (CRE) sector. He warned that ongoing pressures in this sector might place banks at risk of being targeted by short sellers, potentially leading to liquidity issues.

Increased Sensitivity of Banks to CRE Losses

Governor Das explained that banks are showing heightened sensitivity to both expected and unexpected CRE losses due to their relatively high CRE coverage ratios. He cautioned that banks with significant investments in global CRE could face liquidity shortages as short sellers might target them, thereby affecting investor confidence.

Call for Vigilance and Regulatory Measures

Das emphasized the need for regulators to remain vigilant and implement proactive measures to address systemic stability and balance sheet risks. He stressed the importance of taking forward-looking regulatory steps to manage these emerging challenges.

Global CRE Market Trends

According to the International Monetary Fund, global CRE prices have dropped by 12%. The sector remains sensitive to high vacancy rates and rising debt costs, which could further impact its stability.

India’s Commercial Real Estate Sector Update

In India, the commercial real estate sector has experienced a significant increase in bank loans, rising by 22.8% to ₹4.21 lakh crore as of June 28, 2024. This growth outpaces the 13.9% increase in non-food credit. Note that this data does not yet reflect the impact of the merger between HDFC and HDFC Bank, which became effective from July 1, 2023.

Inflation Trends and RBI’s Stance

Governor Das also discussed inflation trends in India, noting that while inflation has eased from its peak of 7.8% in April 2022 to around the RBI’s comfortable level of 4%, there is no immediate rush to cut interest rates. He mentioned that inflation remains below 4% for the second consecutive month and has been under the RBI’s comfort level of 6% for the past 12 months.

Future Inflation Projections

The RBI’s forecasts indicate that inflation might further soften to 4.5% in 2024-25 and 4.1% in 2025-26, down from around 5.4% in 2023-24. Inflation in India slightly increased to 3.65% in August from 3.6% in July.