The Press Association Article - UK Banks face £70bn property loss

29th December, 2008

British banks could collectively face losses of up to £70 billion on loans they made on commercial property, it has been reported.

The massive write-downs could force some of the banks into a further round of taxpayer bail outs, according to a report in the Telegraph newspaper.

The potential size of the write-downs are based on forecasts by investment bank Close Brothers estimating that the value of commercial property could dive by between 50% and 60% by the end of 2009 compared with its peak in 2007.

Many property experts say values have already dropped by around 30% this year, leaving further drops of 20% to 30% to go.

It is thought that UK banks are particularly exposed to the collapse in commercial property values as they advanced up to 95% of a property's value to private investors.

Close Brothers refers to a study carried out by De Montfort University which claimed that the UK's leading banks collectively had a £250 billion exposure to commercial property loans - twice the level they had before the recession in the early 1990s.

It added that around £83 billion of this figure was money that was lent at the peak of the commercial property market.

Gareth Davies, a managing director in Close Brother's restructuring team, told the Telegraph: "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."

The group said its forecasts were gloomier than many because it believes the lack of availability of debt finance and a limited number of investors with equity capital for acquisitions meant that any commercial property sold would now only achieve a "distressed valuation".