Austria’s central bank, the OeNB, is raising the alarm over rising risks in the commercial property market, leading to new rules to make banks safer.

From the middle of next year, banks will need to keep more capital on hand if they have loans in this area, the OeNB said in its latest Financial Stability Report. Specifically, banks will have to set aside an additional 1% capital for loans in the commercial real estate sector, as a “sectoral risk buffer.”

While commercial property loans are becoming more risky, the residential property market is holding steady, partly due to stricter lending rules.

Growing Risks in Commercial Property Loans

Loan quality in the commercial property sector has worsened significantly. By mid-2024, the percentage of non-performing loans (NPLs) in this sector had climbed to 5.5% – double the level seen in 2020, according to the OeNB.

By comparison, the overall NPL rate across all real estate loans is under 3%, with the residential sector performing better, at well under 2%. Over 80% of residential loans are considered low-risk due to strict lending rules.

Weak Economy Reduces Demand for Loans

Austria’s economic challenges are adding to the trouble. Now in its second year of recession, the country’s economy is reducing demand for loans, especially as businesses hold back on new investments. The OeNB predicts that the economy will shrink by another 0.7% in 2024.

Bank Profits Remain Strong

Despite economic challenges, Austrian banks are still seeing high profits. In the first half of 2024, banks reported a total profit of €7 billion. Foreign business has been a big help, now making up 40% of banks’ assets. Profits from Austrian bank branches in Central, Eastern, and Southeastern Europe alone exceeded €3 billion. The banks’ capital levels remain strong at 17.7%, well above the European average.