FSA review of commercial property shortsighted

Nia Williams

March 31, 2010

It warns that the picture painted within the risk report does not stress the real severity of the issues faced by banks if the economy is to recover. Furthermore, the Government’s desire to force UK banks to lend more could be fundamentally unrealisable until the market itself recovers.

Hatfield Philips highlights the fact that a substantial number of the 60% of outstanding CMBS loans set to mature by the end of 2012 is unlikely to be able to refinance or repay their debts. Much of the scramble to raise new capital by the banks has been explicitly focused on shoring up their balance sheets against these anticipated losses. However, the Government’s strategy, announced in the pre-election budget, of committing Lloyds and RBS to increase lending to £94bn, presents further problems as it is likely that further capital would be required before they could consider additional new lending.

The primary and special servicer believes that until a substantial majority of the current backlog of commercial property debt begins to work its way through the system, lenders will be faced with a destructive scenario of a subdued market hampering efforts to clear overhanging debt which will only continue to subdue the market. With approximately £160bn of the £225bn total debt outstanding maturing over the next five years, the impact of such a cycle on the UK banking sector and broader economy could be severe.

Hatfield Philips also warns that the multitude of political and regulatory bodies looking to implement regulatory reform need to conclude their reviews as rapidly as possible. Whilst uncertainty persists about lenders’ future capital and regulatory obligations they can have no incentive to increase lending. This is especially true with reference to higher risk lending, which is an essential component of a recovering economy.

Stewart Hotston, director of compliance and reporting, Hatfield Philips, “The problems facing the commercial property market are severe. The questions facing lenders are not simply about lending more debt but whether they can afford to lend, whether the market can sustain more debt and just how quickly the economy will recover. Successfully emerging from this recession will need a more considered approach and should demonstrate that both balance sheet lenders and the CMBS market are managing their way through the problem.”

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