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December 29, 2008

Writedowns on commercial property loans could reach £70bn

by Gill Montia

Story link: Writedowns on commercial property loans could reach £70bn

UK banks could be facing huge writedowns on commercial property loans in the year ahead.

According to a report in the Daily Telegraph, a collective loss of up to £70 billion is being forecast by Close Brothers.

The investment bank is predicting that the value of commercial property could plummet by between 50% and 60% by the end of 2009, from its peak in 2007.

A study from De Montfort University suggests that the UK’s leading banks have a £250 billion exposure to commercial property loans, with around £83 billion of the collective total lent when the market was at its height.

The level of exposure is apparently twice that held by leading banks at the beginning of the recession in the early 1990s.

As with the residential property market, loan-to-value ratios in the commercial sector were high prior to the credit crisis with advanced up to 95% of a property’s value made to private investors.

Most experts agree that commercial property values have already dropped by around 30%.

A further decline of between 20% and 30% would therefore threaten the capital positions of High Street banks already propped up by the £500 billion bail out provided by the Government in October.

Both Royal Bank of Scotland and HBOS are particularly vulnerable because they have large commercial property loan books and could therefore be forced into raising further funds to protect their Tier 1 ratios.

 

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