May 2012 – Commercial property recession and how it has affected the banks

The commercial property industry has slipped back into recession, heaping pressure on banks as they battle to shed £300bn of exposure to the sector. Figures published on Friday by IPD, a property research group, will show that the average value of offices, shops and industrial warehouses has fallen for a second consecutive quarter. The decline, underscoring the impact that the eurozone crisis has had on commercial property, means that values are now a third below 2007 peaks. The situation is twice as severe as in the early 1990s recession, where property values recovered to within 15 per cent of pre-crash levels after five years.

“As property values continue to decline, investors are unlikely to want to develop, which will lead to further pain,” said Malcolm Frodsham, director of research at IPD. He added that it was crucial regulators held back from introducing measures that would stifle recovery prospects. Banks are poised to increase the cost of holding commercial property loans. The change in regulation is likely to have a big impact on Lloyds and Royal Bank of Scotland, both of which hold tens of billions of pounds of property debt as a legacy of profligate lending in the years leading up to the financial crisis. “Increasing bank and insurance company capital requirements at this point in the cycle, for example, will only further depress prices, which in turn creates adverse outcomes for other institutions holding real estate assets and further contraction in economic activity in the sector,” Mr Frodsham said.

Increased pressure from the banks is likely to create opportunities for the savvy investor, particularly those that are cash rich and have the ability to perform quickly. The deterioration of property values should spark interest from investors looking to benefit from buildings being sold at distressed prices.

If you would like impartial advice on the value of your property or would like to purchase an investment please contact Johnson Tucker on 0191 269 7890.

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