New research shows the commercial slump could trigger nationalisation for some lenders.
By Ben Harrington
Dcember 28, 2008
Britain's banks face up to £70bn of losses on commercial property loans, enough to force some of them into a further round of taxpayer bail-outs.
Investment bank Close Brothers forecasts massive writedowns in light of its forecast 50pc-60pc slump in commercial property values by the end of 2009 compared to the market’s 2007 peak. Most property experts believe such values have already dropped 30pc this year.
Such writedowns could again imperil banks’ capital ratios, potentially forcing them once more to go cap in hand to the Government.
UK banks are particularly exposed, having fuelled the commercial property sector boom by lending as much as 95pc of a property’s value to private investors.
Close Brothers refers to a study by De Montfort University, which found that the country’s leading banks have a total £250bn exposure to commercial property loans - twice the amount they had before entering the recession in the early 1990s. Some £83bn of the total was orginated at the peak of the market.
Arguing that commerical property values could more than halve, Close Brothers said: “The fall is higher than most observers estimate. No available debt finance and a limited number of investors with equity capital for acquisitions means that anything sold will only realise distressed valuations.”
The slump in valuations could force banks, such as Royal Bank of Scotland and HBOS which have lent billions of pounds to commercial property investors into a fresh round of capital raisings.
“Commercial property is a major issue facing the banks during the next couple of years. We believe the scale of the problem has not been built into the recapitalisation programme developed by the UK Government.” said Gareth Davies, a managing director in Close Brothers’ restructuring division.
Last week debt rating agency Moody’s warned that it may downgrade the credit ratings of RBS – which is 56pc owned by the taxpayer – over concerns about its huge exposures to commercial property in the UK, Ireland and the US as well as the rapidly slowing UK economy.
Moody’s said it was reviewing RBS’ “B Bank Financial Strength Rating” and also its Aa1 senior long-term debt.
“The £20bn capital recently raised by the bank from the Government provides a significant buffer against additional writedowns and provisions, however, the ongoing earnings volatility and expected decline in asset quality indicate that the bank’s ratings are less consistent with other B BFSR rated financial institutions,” Moody’s said.
Problems surrounding banks’ exposure to commercial property comes as City analysts warn that RBS is set for a New Year profit warning.
If RBS takes an extremely aggressive attitude to the valuation of the assets it bought from Dutch bank ABN Amro last year, the Edinburgh-based bank may record losses of up to £28bn with its full-year figures, warned UBS analysts.
The potential losses at RBS emerged as it struggles to sell its insurance division, which includes the Direct Line and Churchill brands, for £7bn.
An RBS spokesman played down weekend reports that the bank is set to abandon the sale after receiving low-ball offers from private equity firms CVC Capital and BC Partners.
The spokesman said the bank was “continuing discussions with a number of parties”.
By Ben Harrington
Dcember 28, 2008
Britain's banks face up to £70bn of losses on commercial property loans, enough to force some of them into a further round of taxpayer bail-outs.
Investment bank Close Brothers forecasts massive writedowns in light of its forecast 50pc-60pc slump in commercial property values by the end of 2009 compared to the market’s 2007 peak. Most property experts believe such values have already dropped 30pc this year.
Such writedowns could again imperil banks’ capital ratios, potentially forcing them once more to go cap in hand to the Government.
UK banks are particularly exposed, having fuelled the commercial property sector boom by lending as much as 95pc of a property’s value to private investors.
Close Brothers refers to a study by De Montfort University, which found that the country’s leading banks have a total £250bn exposure to commercial property loans - twice the amount they had before entering the recession in the early 1990s. Some £83bn of the total was orginated at the peak of the market.
Arguing that commerical property values could more than halve, Close Brothers said: “The fall is higher than most observers estimate. No available debt finance and a limited number of investors with equity capital for acquisitions means that anything sold will only realise distressed valuations.”
The slump in valuations could force banks, such as Royal Bank of Scotland and HBOS which have lent billions of pounds to commercial property investors into a fresh round of capital raisings.
“Commercial property is a major issue facing the banks during the next couple of years. We believe the scale of the problem has not been built into the recapitalisation programme developed by the UK Government.” said Gareth Davies, a managing director in Close Brothers’ restructuring division.
Last week debt rating agency Moody’s warned that it may downgrade the credit ratings of RBS – which is 56pc owned by the taxpayer – over concerns about its huge exposures to commercial property in the UK, Ireland and the US as well as the rapidly slowing UK economy.
Moody’s said it was reviewing RBS’ “B Bank Financial Strength Rating” and also its Aa1 senior long-term debt.
“The £20bn capital recently raised by the bank from the Government provides a significant buffer against additional writedowns and provisions, however, the ongoing earnings volatility and expected decline in asset quality indicate that the bank’s ratings are less consistent with other B BFSR rated financial institutions,” Moody’s said.
Problems surrounding banks’ exposure to commercial property comes as City analysts warn that RBS is set for a New Year profit warning.
If RBS takes an extremely aggressive attitude to the valuation of the assets it bought from Dutch bank ABN Amro last year, the Edinburgh-based bank may record losses of up to £28bn with its full-year figures, warned UBS analysts.
The potential losses at RBS emerged as it struggles to sell its insurance division, which includes the Direct Line and Churchill brands, for £7bn.
An RBS spokesman played down weekend reports that the bank is set to abandon the sale after receiving low-ball offers from private equity firms CVC Capital and BC Partners.
The spokesman said the bank was “continuing discussions with a number of parties”.
