German property lender sees weakness in U.S. commercial real estate

FRANKFURT (Reuters) - A German bank that finances property worldwide is bracing for a possible hit from the U.S. office market this year as it looks for "solutions" with clients to keep loans from souring, its chief executive said.

Banks and regulators around the world have identified commercial real estate as a weak link in global finance, with low occupancy rates after the pandemic and a surge in interest rates pressuring the sector.

Jochen Kloesges, CEO of German bank Aareal, said the U.S. office market was challenging, though it should be seen in shades of grey rather than black-and-white.

"The U.S. is dark grey. You have to be honest about it," he told journalists on Tuesday evening.

Aareal has a U.S. office loan portfolio of around 3.9 billion euros ($4.26 billion) across some 50 transactions. Around 4% of the portfolio is so-called Stage 3 loans that are at risk.

"It's clear that individual cases can hit us in this portfolio this year. This can result in risk provisions here and there that are perhaps somewhat higher, or also considerably higher, than we originally anticipated," he said.

The bank has previously expected allowances for possible loan losses this year of between 170 million euros and 210 million euros, but it has said it is comfortable if it exceeds that level because it is generating healthy interest income.

Aareal has been working with customers over the past year to deal with the sector's weakness, Kloesges said.

"It is not our goal to make customers sweat. We try to find solutions together," he said.

Aareal will still meet its targets for the year, and the other property sectors it finances, including hotels, retail and student housing, are going strong, the CEO said.

($1 = 0.9157 euros)

(Reporting by Tom Sims; Editing by Sharon Singleton)