De Nederlandsche Bank (DNB) has warned that pension funds are exposed to losses due to price corrections in commercial real estate, which will have a direct impact on their balance sheets.

Publishing its Financial Stability Overview (OFS) the central bank of the Netherlands said Dutch real estate funds, in which pension funds in particular invest, have quadrupled in size over the past 15 years to some €135bn. DNB explained that the risks of these funds seem manageable for now, in part because the frequency at which investors can redeem their money from the funds is low.

In total, Dutch banks, insurers and pension funds have a combined exposure of €360bn to commercial real estate. Due in part to higher financing costs, this market has been under pressure since mid-2022 – the transaction value of commercial real estate has fallen by 13 per cent since then. Besides higher financing and construction costs, structural changes such as online shopping and remote working also play a role, reducing the need for retail and office space.

Furthermore, the bank warned that financial institutions are facing growing interest rate and credit risks, mainly due to higher refinancing costs and lower repayment capacity among businesses. For example, 56 per cent of total Dutch corporate debt is due to mature or subject to an interest rate review within the next two years, which will lead to higher expenses soon.

Heightened credit risks are not yet reflected in Dutch banks' figures, but the bank said vigilance remains essential. DNB also stated that pension funds and insurers are vulnerable to more sluggish economic growth or persistently high inflation due to the relatively high valuations of the equities and other risky assets they invest in.

In a bid to combat high inflation in the euro area, the European Central Bank has raised interest rates in a rapid series of hikes, from minus 0.5 per cent to 4 per cent.

Commenting, DNB president, Klaas Knot, said: “This was much needed, as inflation proved to be persistent and is still too high. This has made it more expensive for businesses, households and governments to borrow money. While this is a deliberate objective of our monetary policy, it comes with risks to financial stability. These risks need to be adequately managed and absorbed.”

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