The Germany commercial property market "remains a source of elevated risk," one that financial regulators are monitoring closely after a rapid succession of interest rate increases hit property values.

"Higher interest rates and energy prices caused a number of risks to emerge," Theurer said. “Real estate prices fell and credit risk rose."

German Financial System ‘Weathered' High Rates

The German financial system has "weathered the phase of exceptionally strong rises in interest rates well overall," he said. "The resilience of the banking system is adequate thanks to high capital reserves. Vulnerabilities are declining, but only gradually." 

But conditions in the commercial property market are influencing German open-end retail real estate funds, according to the Bundesbank. 

"As a rule, such funds have high liquidity risk," Theurer said. "Most recently they have seen net outflows, with investors anticipating higher returns on alternative investments. This could accentuate negative developments in commercial real estate."

Given the overall risk, a package of additional capital buffers that regulators ordered banks to build up in 2022 "remains appropriate." 

German Economic ‘Malaise' Shows No Signs Of Improving

In the meantime, Germany's "economic malaise" showed no signs of improving, according to a survey compiled by S&P Global. The latest HCOB ‘flash' PMI® survey showed business activity in November falling for the fifth month running and at the quickest rate since February.

The first decrease in services activity for nine months compounded a "sustained weakness in manufacturing production," the survey said today. Weaker demand for goods and services led to further job losses during the year's penultimate month, it said. 

"Until recently, the German economy was stabilized somewhat by the service sector, which was making up for the steep decline in manufacturing," Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said. "Not anymore,"

German Economy Hurt By Domestic Political Turmoil

While German officials regularly point to trade tensions and geopolitical risks, domestic political turmoil has weighed on economic growth. Political uncertainty since the announcement of snap elections "isn’t helping," Rubia said. 

Amid the weak German economy, corporate insolvencies have "risen significantly," according to the Bundesbank. Insolvencies among trading companies are particularly high – totaling over €7 billion as of the end of June 2024.

Insolvency claims against the services sector and against the real estate activities sector are somewhat lower. They are nevertheless "substantial" at €5.5 billion and roughly €6.5 billion, respectively, according to the Bundesbank. 

"The path ahead is an arduous one," Theurer said. "Geopolitical tensions continue to harbor risks to the future stability of the financial system."

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