PropertyAug 17 2016

Property sector turmoil could cost big banks billions

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Property sector turmoil could cost big banks billions

UK banking giants could be hit with losses amounting to £12bn if the commercial property sector continues to see a slump in prices.

According to stress test results from credit ratings agency Moody’s, six of the UK’s biggest lenders could suffer billions in losses if commercial property prices fall by up to 10 per cent.

Moody’s expects the commercial real estate sector to weaken in the “coming quarters”, as pressure has ramped up following the country’s vote to leave the European Union.

Commercial real estate has been having a hard time for a number of months, as investors panicked following the Brexit vote and cashed in their investments.

A number of large property funds remain suspended, as providers seek to stem withdrawals and protect the remaining investors from falling share prices.

The Moody’s report identified the Royal Bank of Scotland as the lender likely to suffer the most if property prices plummet, with its exposure amounting to £25bn at the end of June.

Lloyds was next on the list, with total commercial property investments hitting the £20bn mark.

HSBC, Nationwide, Santander and Barclays would also be hit by the downturn, the report said.

Andrea Usai, senior vice president at Moody’s, said: “Following the vote to leave the EU, we have seen the collapse of some large commercial real estate deals, as well as the suspension of redemptions at some UK property funds.

“These events signal a sharp change in investor sentiment.”

A severe stress would certainly erode capital, and materially in some cases. Andrea Usai

Despite painting a rather gloomy picture of the sector, the report also emphasised that big banks are in better shape to cope with a weakening commercial property sector than in the 2008-2009 financial crisis.

It estimated that banks have been shedding their exposure to commercial real estate by 40 per cent since 2010, and predicted the amount invested in this sector is now nearly £85bn.

At the end of 2010, this figure stood at £139bn.

Ms Usai said: “Though banks may be better placed to deal with a commercial property slump than they were a number of years ago, a severe stress would certainly erode capital, and materially in some cases.”

Moody’s base-case scenario estimates that average UK commercial property values will decline by up to 10 per cent, which is far less than the level seen during the financial crisis, when they fell by around 45 per cent.

katherine.denham@ft.com