commercial real estate (CRE)

Claire Jones

Do today’s Bankstats data go some way to explaining why the Financial Policy Committee is so concerned about the commercial real estate sector?

The Bank of England data show that, at £2.94bn, write-offs for bank and building society loans to non-financial corporations in the three months to June were at their highest level since the Bank began collecting the data in 1993. The figure jumped from £1.08bn in the first quarter. The previous high was £2.49bn, seen in the final three months of 2009.

How much of this is accounted for by commercial real estate loans? Read more

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. Read more

$172bn is too big a number to ignore. Marla Singer has trawled through footnotes and found that the Fed may be exposed to European banks via swap agreements made by the banks with failed insurance giant AIG. It’s not definite, but it’s big if it’s true.

The argument runs as follows: (1) European banks arranged swaps with AIG Read more

The ratings agencies have been busy: we are awash with downgrades and warnings. First up, S&P. They have ranked banks’ health using a new methodology, and it makes for grim reading. Just nine of 45 banks exceeded the minimum “risk-adjusted capital” ratio (for example, HSBC did well; UBS and Citigroup less so). The results are important because the new methodology foreshadows the new capital regime ratio likely to be adopted by Basel next year. S&P conclusion: “Capital for the majority of banks remains a relative weakness.”

Next, Fitch has downgraded Mexico to BBB, just two notches above junk status. Read more

As the IMF joins calls for a stronger yuan, a Xinhua report on Saturday said the Chinese government would not allow the renminbi to appreciate against the dollar in the short term. Just hours before Obama was due to arrive in China, the authorities there warned that the Fed is fuelling speculative investments and endangering the global recovery through loose monetary policy. Read more

Good macro data from the UK, but a warning from Fitch that the UK is the likeliest of the big economies to suffer a rating downgrade. The chorus of concerns about CRE sings louder, and much debate on Dodd’s regulation reform proposals Read more

Bad news for RBS, less-bad-than-recent news for the United States, and good news for Asia, all rounded off with a warning on asset bubbles. And the market price of water in Yemen has quadrupled in four years Read more

Japan prepares to unwind part of its stimulus package as the IMF warns the country’s debt path is out of control, raising a “real risk” that the country could end up in default. Further echoes of the start of the crisis, as CIT files for bankruptcy, an analyst cautions of further Citi write-downs, and concerns about commercial real estate spread across the Atlantic Read more