Commercial real estate lending a bigger risk than previously thought, OSFI says
Canada’s top banking regulator is flagging commercial real estate lending as a bigger risk than previously thought as higher interest rates persist and a practice known as co-lending increases.
The Office of the Superintendent of Financial Institutions warned in an Oct. 12 update to its list of the highest risks facing the sector that valuations in a fast-changing landscape could quickly become outdated and that trends including co-lending could increase default risks and recovery values.
Among OSFI’s concerns is that ratings changes appear to be lagging market conditions, suggesting that risk assessments and collateral valuations used by financial institutions “may not appropriately reflect the risk environment.”
The regulator has alerted the banks that it is taking a closer look at how they are managing commercial real estate loans, and released interim regulatory guidance Sept. 29 that spelled out detailed expectations for processes and procedures including underwriting practices, debt service capacity assessments and portfolio management.
“The outlook remains difficult as seen through an increasing number of strategic defaults in the office space, falling real estate investment trust values relative to their historical net asset value estimates and rising U.S. commercial mortgage-backed securities delinquency and special servicing rates, especially in the office segment,” OSFI said in its Oct. 12 update.
Moreover, the regulator is noticing concerning practices in the commercial real estate market, in particular an increase in the use of co-lending arrangements such as layering and “participation” agreements where risk is “tranched” between multiple lenders and entities.
“They can affect lenders’ rights and remedies
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