Commercial real estate poses risk, says BoE
LONDON: When it comes to potential risks to Britain's financial system, many fingers point to its housing market where lending soared in the bubble years.
But this month the Bank of England (BoE) suggested lending to commercial real estate may pose a bigger risk. In setting out its five key risks to the financial system, the Bank highlighted lending to commercial property while making no mention of house prices.
Peak to trough, commercial real estate fell in value by about 40 per cent. Recently, the UK has shown some improvement. But as the Bank makes clear, those returns hide a multitude of possible pitfalls.
In particular, there is the size of UK banks' portfolio of loans to commercial property. Roughly a third of all corporate lending worldwide is to commercial real estate, and while some markets are recovering, in others, such as Ireland where UK banks have lent heavily, values are still falling.
"Property values in most countries are still considerably below pre-crisis levels, when loan to value ratios were up to 85 per cent," the Bank says. "This means a significant proportion of CRE mortgages are in negative equity."
Consequently, borrowers whose loans are maturing cannot refinance them. As a result, lenders are holding loans on their books rather than foreclosing and crystallising the losses - although sensible banking practice requires them to do so. This practice, known in the industry as "extend and pretend", is a concern, property bankers say. "It's more like delaying and praying," said one. Moreover, lending capacity for UK real estate is shrinking as foreign banks exit the market. Lloyds said earlier this month that its profits would halve because of write-offs on its Irish property portfolio. - PB News