Commercial Finance Specialists

The Bank of England has warned that a vicious circle of 'panic-selling' of commercial property by banks, could potentially cause the start of a ruinous double dip in values. Further risks of worsening economic conditions may also lead to widespread loan defaults by UK real-estate firms.

Commercial property prices have already dropped 50% after peaking in summer 2007. Some so-called prime assets have made a recovery in the last six months.

But today the Bank has suggested that this recovery could be short-lived. In its biannual Financial Stability Report, the Bank highlights that vacancy rates have risen sharply to 12.6% – up 3.6% in the year to October. Simultaneously, rents have seen a sharp fall, which has lead to plunging income for property firms and raising the prospect of an increase in failed loan repayments.

The need for banks to refinance loans worth a staggering £160bn is just as serious a concern. Outstanding commercial property loans pushed beyond £250bn at the end of September – six times greater than in 1999. As yet, banks have held back from selling real-estate assets inherited due to covenant breaches or clients going bankrupt. Fear of crystallised losses have meant banks even delaying the revaluation of properties to protect prices, according to the Stability report. Banks holding commercial mortgage backed securities could be caught in a "possible" increase in impairments.

The bank has warned that loan defaults will lead to "the probability of rating downgrades across the capital structure, increasing associated capital requirements" and a new wave of mark-to-market trading book deficit for banks.

Written by Sam Gooch