More than 50% of properties used as collateral have lost value between 2019 and 2023, making it harder for businesses to access credit.
The collapse of real estate collateral: a problem for businesses
In recent years, the value of non-residential properties used as collateral for bank loans has significantly declined. According to an analysis by the Unimpresa Research Center, more than half of the real estate assets used as collateral have experienced devaluation between 2019 and 2023. This phenomenon raises concerns about the financial stability of businesses, which may find themselves with weaker guarantees when seeking new financing.
Price decline and the cost of credit
The primary cause of this devaluation is the moderate decline in non-residential property prices, including offices, retail spaces, and industrial facilities. The situation has been exacerbated by economic uncertainties and the rising cost of credit, making it more difficult for many businesses to secure new loans. According to Giuseppe Spadafora, Vice President of Unimpresa, the greatest risk is that an increasing number of companies will have a higher loan-to-value ratio, further reducing their financing capacity.
The resilience of the banking system and the impact on SMEs
Despite the devaluation, the Italian banking system remains relatively resilient, thanks to prudent policies in property valuation. However, the risk of a credit contraction cannot be ruled out. Small and medium-sized enterprises (SMEs), which often use their business premises as their main collateral, could be the most affected. To prevent a domino effect on the real economy, institutional interventions such as public guarantee schemes and debt restructuring incentives may be necessary.
Loan-to-Value: a key indicator of banking risk
Unimpresa’s analysis, based on data from the Bank of Italy, highlights that the Current Loan-to-Value Ratio (LTV-C), a key indicator for measuring credit risk, has remained manageable despite the devaluation. As of December 2023, the average LTV-C stood at 55%, down from 60% in 2019. However, loans with an LTV-C above 80%, considered high risk, still account for 13% of the total. Any further drop in property prices could increase this percentage, though expected bank losses would remain moderate.
The role of banks in collateral reassessment
Italian banks adopt a cautious approach to collateral valuation, with approximately 70% of properties reassessed annually—a percentage higher than the European average. This strategy helps keep credit risk under control and ensures a degree of stability in the financial sector. However, businesses with an LTV-C above 80% may face stricter conditions for obtaining new financing or even be forced to recapitalize to maintain a sustainable debt-to-collateral ratio.
Consequences for the real estate market and businesses
The impact of non-residential property devaluation affects not only banks but also the real estate market as a whole. The lower value of collateral may lead credit institutions to require additional coverage or impose stricter loan conditions, especially on companies more exposed to the real estate sector, such as construction firms and property management companies. This scenario could result in further credit contraction and increased selectivity in loan approvals.
Conclusion: a fragile balance between credit and collateral
Italian businesses are facing a complex challenge: the decline in the value of real estate used as collateral threatens their ability to access bank credit. While the financial system appears capable of absorbing the impact without major disruptions, SMEs remain the most vulnerable segment. In this context, institutional intervention is crucial to prevent a ripple effect on the real economy.
What do you think? Has your business experienced difficulties in accessing credit due to real estate devaluation? Leave a comment in the form below!
