Com­mer­cial real es­tate poses risk, says BoE

The Pak Banker - - Company& -

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

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