Banks face losses as commercial property stocks fall

by Gill Montia

Story link: Banks face losses as commercial property stocks fall

Capital Economics is warning that UK banks could face large losses as a result a sharp fall in the value of the UK’s commercial property.

The economic forecasting consultancy is warning that £7 billion could be wiped off commercial property stocks in the next two years and that the figure could rise to £18 billion should the UK economy enter a period of recession.

The value of Britain’s shops, offices and industrial premises has fallen by around 15% since June of last year and Capital Economics is predicting that the trend will continue, with the possibility of a 30% decline by the end of 2009.

In recent years, banks have typically financed commercial property investments on loan-to-value ratios of 80%. If values continue to fall, many investors could find it difficult to refinance their debt.

HBOS, HSBC, Royal Bank of Scotland and Barclays are leading lenders in the market.

Fears of a commercial property crash are also evident in the insurance sector. Since the beginning of this year, a number of insurance companies, including Scottish Equitable and Scottish Widows, have restricted redemptions from commercial property funds.

The restrictions are aimed at preventing a run on the funds.